Lost in Translation: The Impact of Language on National FDI Stocks

Abstract

This study applies insights from institutional economics and language studies to examine language's impact on national foreign direct investment (FDI) stocks. Using a gravity model to analyse 219,325 country-pair observations across 246 countries from 2010 to 2019, we find that larger language differences between source and host countries are associated with reduced bilateral FDI stocks. Additionally, language deviation from English in either country negatively affects FDI stocks. The influence of language differences on FDI is weakened by formal institutional proximity and cultural closeness between the countries involved. This research underscores the significant role of language in shaping FDI stocks.

Keywords: Institutions, Language, FDI stock, Uncertainty, English language