Invest in Friends or Foreigners? The Role of Social Connectedness in Foreign Direct Investment

Abstract

Using Facebook friendship links as a proxy for social ties for a large set of country pairs across the world, this paper shows that cross-country social connectedness is an important determinant of foreign direct investment (FDI). We find that social connections can account for a significant share of more traditional cross-country determinants such as distance. Importantly, we show that social connections can help to overcome three different types of investment hurdles: information asymmetries, bad institutions, and global (macroeconomic) uncertainty. To strengthen identification, we exploit migration and genetic distance as instruments.

Keywords: FDI, investment, social connectedness, information asymmetries, institutions, uncertainty

JEL Classification: F21, F23, G41