Social Connectedness and Foreign Direct Investment

Abstract

This paper demonstrates that cross-country social networks play a significant role in mitigating frictions that hamper foreign direct investment (FDI). First, we document an economically important relationship between real-world social networks, measured through friendship links on Facebook, and FDI. We show that this relationship is not driven by current or past migration, physical distance or other well-known determinants of FDI. Importantly, we show that social connectedness significantly reduces the negative effects of legal, cultural and institutional frictions between countries. Social connections also alleviate investment frictions arising from climate-change-related physical and transition risks and substantially reduce the negative effects of macroeconomic uncertainty.

Keywords: Investment, FDI, social networks, climate risk, uncertainty, institutions