Complex dependence in foreign direct investment: network theory and empirical analysis

Abstract

We develop a theoretical framework that accounts for complex dependence in foreign direct investment (FDI) relationships. Conventional theories of FDI focus on firm-, industry-, country-, or dyad-level characteristics to account for cross-border capital movements. Yet, today's globalized economy is characterized by the increasing fragmentation and dispersion of production processes, which gives rise to complex dependence among production relationships. Consequently, FDI flows should be represented and theorized as a network. Specifically, we argue that FDI relationships are reciprocal and transitive. We test these hypotheses along with conventional covariate determinants of FDI using an exponential random graph model (ERGM) for weighted networks. We find that FDI networks exhibit strong reciprocity and transitivity. Our network approach to studying FDI provides new insights into cross-border investment flows and their political and economic consequences, and more generally the dynamics of globalization. In addition to our substantive findings, we offer a broad methodological contribution by introducing the ERGM for count-weighted networks in political science.

Gone with the epidemic? The spatial effects of the Covid-19 on global investment network

“…Drawing on the analysis methods of existing research on the dynamic mechanism of network formation( Schoeneman et al, 2022 ), we implement an ERGM (exponential random graph model) to account for the covariate determinants of OFDI network formation. A typical ERGM model is able to estimate the effect of network sub-structure on network formation( Hunter et al, 2008 ).…”

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“…They represent all transactions carried out between the direct investor and the company. FDI exports affect transnationality in two ways, either replacing it or supporting it [12]. FDI reflects a long-term interest in controlling a resident enterprise in another country by resident entities in an economy [11].…”

“…Through these solutions, it will be possible to shorten the production and eliminate excess waste. This technology is considered a potential tool for the Slovak industry, which can transform it from reactive to proactive and from local to global [12]. The smart industry is an incremental process in industrial activities that integrally configures information into knowledge and transforms it into competitive products [53].…”

“…Research and development in information and communications technologies, cybernetics, and industrial artificial intelligence are the main features of smart manufacturing, which will enable a sharp increase in added value. Research and development in Slovakia must be subject to changes that will ensure higher expertise, critical research capacities, and, last but not least, sufficient funding [12]. It is important and necessary to network applications and research centers, with the possibility of using the already existing scientific and development infrastructure in Slovakia.…”

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“…Given that one of our research objectives is specifically to test for transitivity effects, we have adopted an ERGM-based approach, using the implementation made available in the ergm.count [9] package in the R statistical software. This valued-ERGM approach has shown to be effective in measuring similar networks, such as those formed by foreign direct investment, communication, and migration [20,15,29].…”