The Role of Social Capital on Foreign Direct Investments: Evidence from Cross-Country Regressions

Abstract: Since the world witnessed a surge of cross-border investments as a source of economic activity, the relevance, determinants and nature of the phenomenon we call Foreign Direct Investments (FDI) has been studied extensively. The amount of empirical studies is not only extensive but also controversial, as the authors frequently reach contradictory conclusions in their search for determinants, relying only on the assumptive realities of economic theory. This paper seeks to elaborate an analysis of the traditional determinants of FDI through the perspective of Social capital theory. The variable of social capital alone however, cannot reasonably explain the multidimensionality of the phenomenon. This analysis will therefore build on existing research, by including variables that have been ascribed significant explanatory power in previous work, in the cross-country multiple regression model applied. It is suggested that social capital levels in the host country has a direct positive influence on FDI inflows in the univariate analysis, and may additionally, indirectly effect FDI through the channels of market size, GDP per capita and openness to trade. Except from providing empirical support in line with previous studies, this analysis demonstrates the value of examining the determinants of FDI inflows through the lens of Social capital theory.