A Gravity Model Analysis of Portuguese Foreign Direct Investment

Abstract

Cultural and linguistic affinities have been studied in international business through the gravity model and economics of language. International investment theories enable the assessment of organisational, location, and internalisation motivations. The present study assesses the impact of transport costs, common language and market size based on the arguments of the gravity model, economics of language, and international investment theory. This investigation evaluates the relationship between the Portuguese FDI and the gravity model, using panel data between 2005 and 2020. The OLS estimator, PPML-Poisson Pseudo-Maximum-Likelihood estimator, and panel quantile regressions were used as an econometric methodology. Regarding research, we sought to understand to what extent cultural and linguistic issues, namely Portuguese-speaking countries, contribute to explaining Portuguese FDI. The economic dimension of the Portuguese economy and investor countries were introduced into the regression model. In addition, transportation and transaction costs were analysed across geographical distances. The econometric results show that the common language and cultural aspects are positively correlated with the Portuguese FDI, which allows us to conclude that the Portuguese language reduces the asymmetries between the home market and the host country. When panel quantile regressions are applied, it is possible to observe that the Portuguese economy has dimension enough to attract FDI, just as the countries investing in the Portuguese economy have a return on the investment made. Finally, geographical distance negatively impacts FDI, showing that geographical proximity increases the probability of attracting FDI.

The Impact of Geopolitical Risk on Portuguese Exports

“…On the other hand, speaking the same language, in this case, Portuguese, makes it possible to reduce trade barriers with particular emphasis on reducing communication costs. Studies on the economy of language and its impacts on international trade and international investment, such as Leitão (2023), Ginsburgh andWeber (2020), andGrin (2003), support the results found.…”

“…We introduced panel quantile regressions (PQR) to the gravity model as noted Huseyni et al (2019) and Leitão (2023). This estimator makes it possible to identify the heterogeneity between the quantiles of the variables in studies presented in Table 7.…”

“…Moreover, the economy of language (Leitão 2023;Ginsburgh and Weber 2020;Grin 2003) allows us to complement the assumptions of the gravity model. According to these studies, the common language and common surrounding spaces make it possible to reduce trade, transport, and communication costs.…”

“…Based on the literature (Pacheco and Matos 2022;Macedo et al 2019;Gouveia et al 2018), this result allows us to infer that there is geographical proximity. Following the works of Leitão (2023), Fernandes and Forte (2022), Abdullah et al (2021), and Gouveia et al (2018), we used the CEPII (Centre d'etudes prospectives et d'informations internationale) database for the variables of geographical distance (DIST) and common language (Language). The various studies mentioned used the CEPII database because it presents value in bilateral terms.…”

“…Another relevant issue to explain the gravity model is to understand to what extent the common language and cultural affinities make it possible to explain the gravity model and the reduction in communication costs. Leitão (2023), Ginsburgh and Weber (2020), and Grin (2003) analysed the economy of language and concluded that the common language stimulates international trade and investment flows.…”