Spacey Parents: Spatial Autoregressive Patterns in Inbound FDI

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Increasing attention has been given to the impact of third countries on outbound FDI to a given host country. Here, we consider potential third-country effects on inbound FDI. A simple model suggests two sources of such effects on a country's inbound FDI. First, it will tend to receive more FDI fromparent countries proximate to large third countries. Second, FDI from third countries may increase or decrease FDI from the parent country in question depending on whether production spillovers or crowding out effects dominate. Using data on US inbound FDI from OECD countries during 1980-2000, we find strong evidence for parent market proximity effects. We find robust results for third country FDI effects only in a European subsample. There, crowding out effects dominate.

Published: Brakman, S. and H. Garretsen (eds.) Foreign Direct Investment and the Multinational Enterprise. Cambridge, MA: The MIT Press, 2008.

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