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Journal of Economic Integration 2005 December;20(4) :613-630.
Information Technology and Bilateral FDI: Theory and Evidence

Bang Nam Jeon Linghui Tang Lei Zhu 

Drexel University
The University of Southern Mississippi
Copyright ©2005 Journal of Economic Integration

This paper investigates the impact of communication cost on the FDI activities of multinational corporations (MNCs). First, we provide a theoretical foundation for a gravity-type FDI model, which shows that physical distance and communication technology are important determinants of FDI activities. Second, we apply the ITaugmented gravity model to bilateral FDI data for a total of 47 OECD and non- OECD countries from 1980 to 1997 and find that distance is negatively related to inward FDI stocks while the growth of IT, measured by teledensity and celldensity, has encouraged FDI significantly. The impact is found to be more prominent on FDI from G7 countries to OECD countries, than to non-OECD countries, and more prominent in the 1990s than in the 1980s. Moreover, IT plays a more effective role by reducing communication cost when distance is beyond a threshold range.

JEL Classifications: F21, F23

Keywords: Communication cost | FDI | Distance
1. Blonigen, B. and R. Davis (2000), “The effects of bilateral tax treaties on U.S. FDI activity,” NBER Working Paper 7929.
2. Brainard, Lael (1997), “An empirical assessment of the proximity-concentration trade-off between multinational sales and trade,” American Economic Review 87, 520-544.
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