Asymmetric Cultural Proximity and Greenfield FDI

This paper studies bilateral cultural preferences as an asymmetric dimension of cultural proximity and estimates their effect on greenfield foreign direct investment (FDI). We derive a gravity equation of FDI and test simultaneously the impact of both (i) the preferences of investing countries for recipients' culture; and (ii) recipients' preferences for the culture in the investing economies. While the role of investors' preferences can be rationalized with existing supply-side gravity theories of FDI, we propose new mechanisms to explain why recipients' preferences might matter as well. We use exports and imports of cultural goods to proxy for the two directions of cultural preferences. Our results reveal a stronger investment effect of the recipients' preferences, a channel so far understudied.