The FDI Location Decision: Distance and the Effects of Spatial Dependence

International Business Review 23 (2014) 797-810

Posted: 7 Aug 2014

See all articles by Frederic Blanc-Brude

Frederic Blanc-Brude

EDHEC Infrastructure Institute; EDHEC Business School - Department of Economics & Finance

Graham Cookson

Independent

Jenifer Piesse

University of Stellbosch; King's College London - Department of Management

Roger Strange

University of Sussex

Date Written: March 1, 2014

Abstract

We investigate how different conceptions of distance impact upon one of the fundamental decisions made by foreign investors, the choice of foreign direct investment (FDI) location within the selected host country. We argue that the attractiveness of host country locations to foreign investors depends not only upon location-specific attributes such as labor costs, but also upon the location’s proximity to alternative locations. We provide theoretical rationales for how and why alternative concepts of distance might impact upon firms’ FDI location decisions, and explicitly model different measures of geographic, economic and administrative distance. Empirically we illustrate the use of a number of spatial regression models with a new dataset on FDI in Chinese prefecture-cities, and have shown, in this context, that geographic distance is not the ‘best’ measure of distance to use. We find clear evidence of spatial dependence between the cities based upon economic distance, with weaker evidence related to administrative distance. The distinctive contribution of this paper is to emphasize that city-level policy to attract FDI is more likely to succeed if the prefecture-city is economically (and administratively) close to alternative city locations, while any policy expenditure may fail to attract FDI inflows if the prefecture-city is distant from other city locations.

Suggested Citation

Blanc-Brude, Frederic and Cookson, Graham and Piesse, Jenifer and Strange, Roger Nicholas, The FDI Location Decision: Distance and the Effects of Spatial Dependence (March 1, 2014). International Business Review 23 (2014) 797-810, Available at SSRN: https://ssrn.com/abstract=2476721

Frederic Blanc-Brude

EDHEC Infrastructure Institute ( email )

One George Street
07-02
Singapore
Singapore

HOME PAGE: http://edhec.infrastructure.institute

EDHEC Business School - Department of Economics & Finance ( email )

France

Graham Cookson

Independent ( email )

Jenifer Piesse

University of Stellbosch

Stellenbosch, Western Cape
South Africa

King's College London - Department of Management ( email )

Virginia Woolf Building
22 Kingsway
London, England WC2B 6NR
United Kingdom

Roger Nicholas Strange (Contact Author)

University of Sussex ( email )

School of Business, Management and Economics
Mantell Building
Brighton, Sussex BN1 9RF
United Kingdom
(44)1273-873531 (Phone)

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