FDI propensity and geo-cultural interaction in former Yugoslavia: pairwise analysis of origin and destination countries

Abstract

This research examines FDI location choice across the successor states of Yugoslavia roughly 25 years after dissolution. Based upon 12,245 pairwise observations from 2005 to 2016, the paper employs logit models to estimate empirically the impact of geographic distance, cultural similarity, and geo-cultural interaction on FDI propensity. The contributions are twofold. First, while geographic distance and culture similarity are typically modeled as independent FDI determinants, their interaction is also examined here. Second, the paper contributes to the sparse scholarship on FDI in this complex European region, using binary-choice models to highlight its linkages to the global economy. The findings suggest that—in addition to mainstream economic, regulatory, and political factors—a tradeoff exists between distance and culture in attracting FDI. Host governments seeking FDI that promotes economic growth might increase the likelihood of FDI by targeting geographically-proximate partners that are culturally similar. The role of geographic distance in reducing FDI propensity gives way to other enabling variables beyond the distance of 1800 km.