Global FDI Convergence Patterns? Evidence from International Comparisons

Abstract

In this paper we examine, for the first time to the best of our knowledge, the issue of convergence in Foreign Direct Investment (FDI) for a sample of countries representative of the world economy. We distinguish between groups of countries so that we can better understand differences attributed to specific developmental stages and different institutional and regional characteristics. The results of our analysis can be seen as an attempt to evaluate the validity of the New Economic Geography (NEG) theory which predicts a "core-periphery" structure of international production at intermediate trade costs. Our econometric methodology utilizes panel unit root tests, which have previously been used in similar studies, but also appropriate dynamic panel regressions to correctly assess the magnitude of the convergence coefficient.

Furthermore, we provide a simpler derivation for an equivalent estimable equation to the one used in past convergence studies. Our overall results point toward convergence tendencies, contrary to a "core-periphery" pattern. We discuss our results in the context of the relevant literature, along with their policy-making implications for transnational, national and regional investment strategies.

Keywords: FDI, convergence, FDI, new economic geography, panel unit root

JEL Classification: C51, E22, F2, F43