Technological proximity of countries as a factor of inward foreign direct investment to developing economies

Abstract

Over the past decades, incoming flows of foreign direct investment (FDI) to developing countries have increased significantly. However, the share of accumulated incoming direct investments of these countries in the global volume of incoming direct investments remains unchanged. This may indicate the shortterm nature of these investments due to the lack of investors’ motivation to make long-term investments in these countries. In our paper, we make an attempt to identify the most significant determinants of flows of inward foreign direct investment to developing countries based on statistics on bilateral flows of such investments for the period of 2009—2021. For this purpose, we have constructed a gravity model of foreign direct investment. In contrast to the previous studies we have focused on the factor of technological proximity between countries. Firstly, the estimation results allow us to conclude that technological proximity between a recipient country and an investor country has a significant impact on the volume of FDI inflows to developing countries. Secondly, this influence is heterogeneous. The proximity of the technological structure of exports between countries contributes to an increase in FDI inflows to a recipient country. At the same time, countries which are close to each other in terms of the level of technological development of exports have a smaller volume of mutual FDI, while a significant excess of the level of technological development of the investor country over that of the recipient one is a factor of additional FDI inflows driven by a resource-seeking motive. Thirdly, based on the obtained results, we have revealed a list of countries that are the most attractive for Russia in terms of increasing the volume of outward FDI.