Does it matter where your ancestor come from? Genetic distance and bilateral foreign direct investment

Abstract

AbstractThis paper selects 141 countries from 2009 to 2020 to investigate the impact of genetic distance on bilateral foreign direct investment (FDI). Through theoretical and empirical analysis, we get the following conclusions. First, genetic distance has a significant negative impact on bilateral FDI by increasing transaction costs. This conclusion still holds after several robust checks. Second, genetic distance has different effects on bilateral FDI for different countries: (1) If at least one of the two countries is a low‐income country, genetic distance will have a significant negative impact on their FDI, but no significant impact on both high‐income countries; (2) if at least one of the two countries is not a member of the Belt and Road Initiative, genetic distance will have a significant negative impact, but no significant impact on both member countries; and (3) genetic distance has a significant negative impact only when both countries are World Trade Organization members. Third, further analysis shows that a smaller genetic distance has no significant effect on bilateral FDI, and only when the genetic distance is larger than the average would a significant negative impact exists. This paper provides policy recommendations for promoting bilateral investment.