FDI - A Matter of Distance

Sammanfattning: The purpose of this study is to explore how the cultural and geographical distances between the home and the host country influence the location decision of a foreign direct investment. Further, the purpose is also to investigate how this influence has changed during the last eleven years. The research is based on secondary data and existing theories concerning FDI, cultural distance and geographical distance. Findings from previous researchers have also been reviewed to be able to interpret the results. Two hypotheses regarding cultural and geographical distances have been formulated based on existing theories thereafter tested. The investigation period is between 1992 and 2002. The hypotheses have been analysed by looking at patterns of cross-border FDI flows from and into Sweden over time. The overall results show that the cultural as well as the geographical distance affects the FDI flow negatively. This means that the greater the cultural and geographical distances the less FDI is undertaken between Sweden and a foreign country. A pattern of decreasing correlation between FDI and cultural and geographical distances could be distinguished for the later part of the period. Further, it has been shown that years with large amounts of FDIs are less sensitive to cultural and geographical distances. Finally, the cultural distance is shown to be more important to Swedish investors and to foreign investors in Sweden than the geographical distance.