The determinants of international business: an empirical investigation

In this paper, we document how geographical, political, and cultural factors affect international business. In particular, we investigate the determinants of bilateral trade and foreign direct investments (FDI) for a large sample of countries. We use standard sources for the data on bilateral trade, while we use an unexplored dataset for FDI, including a large number of developing countries. Our analyses provide the following results. First, geography is a significant determinant for both trade flows and FDI. The physical distance between two countries is negatively correlated with the amount of bilateral trade flows and FDI. Second, preferential trade agreements, such as Custom Unions and Free Trade Areas, are significant determinants of the pattern of bilateral trade flows, but do not seem relevant for FDI. Third, cultural linkages, such as sharing the same legal system and colonial past, are significant determinants of both bilateral trade flows and FDI. Finally, sharing the same language and religion is positively correlated with the amount of bilateral trade flows, but not with the amount of FDI.