Foreign direct investment: The human dimension

This paper argues that FDI is plagued by information asymmetries and moral hazard problems which can be ameliorated by face-to-face interaction. An equilibrium model of FDI indicates that better ability to discriminate among alternative projects in a foreign country through personal contact will increase foreign investment into that country, and spur more investment back from that country. We examine the relationship between FDI and three proxies for personal interaction: distance, language and travel. We find strong evidence supporting the importance of the human dimension in FDI, particularly that associated with travel. The direction of influence appears to be of travel on FDI, rather than FDI on travel.