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Working Papers / Global Economics: Trade Investment and Development

2017

Asymmetric Cultural Proximity and Greenfield FDI

Author(s): Matteo Fiorini, Giorgia Giovannetti, Mauro Lanati, Filippo Santi

Topic(s): Cultural and Religious Diversity // Trade, Investment and International Cooperation //

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ABSTRACT

This paper investigates the role of cultural proximity (CP) on greenfield foreign direct investment (FDI). We build a conceptual framework that explicitly accounts for the asymmetric dimensions in the cultural relationship between two countries, and single out a symmetric element (similarity) and an asymmetric one (attractiveness) within a broad notion of CP. We use bilateral trade in cultural goods to proxy for asymmetric and time-dependent CP. We revisit the existing supply/origin-side theories of bilateral FDI to derive a gravity equation suited for testing the impact of both directions of asymmetric CP. To this end, we introduce several ‘destination-side’ mechanisms to rationalize the potential role of the origin’s culture attractiveness for the country that hosts the investment project. The econometric analysis confirms a positive role of asymmetric CP as a determinant of Greenfield FDI, and suggests a stronger contribution of the destination-side channels