The Effect of Cultural and Political Factors on FDI

Foreign direct investment is a major form of international capital transfer and has increased substantially over the last decades as a consequence of rising global economic integration. It has even grown faster than world GDP and merchandise trade even despite of the large drop in world FDI flows at the turn of the millennium. The two-way flow between developed countries still accounts for the largest part of asset trade. Around 80% of total FDI flows are invested between developed countries. Furthermore, inward FDI stock of developing countries has decreased over the last eight years as a percentage of total inward FDI stock. If developing countries want to reverse this trend it is important for governments and companies of these developing countries to know which factors determine bilateral FDI stock. This paper has tried to contribute empirical findings and results to the question as to what way cultural and political factors influence asset trade and in particular FDI. Therefore, this paper investigated a set of bilateral US inward and outward FDI stock data for the time period 1985-2006 in a panel with 37 countries. Cultural differences proved to have a significant negative effect on bilateral FDI stock. Also, the results demonstrated a significant effect of the type of legal family in a country on FDI. However, the effect of belonging to same legal family is negative. The political situation in a country proved to be a significant determinant of bilateral FDI stock. Countries with a low political rank receive more FDI from the US.