The effect of language on foreign direct investment

Utilizing language measures from a paper by Melitz and Toubal, we estimate a gravity model to examine how various aspects of language may influence bilateral FDI. Our paper shows that while common language can help to foster bilateral FDI between countries, some aspects of language are more important than others. We find that bilateral FDI tends to be higher between countries that share a common official language, have common native languages, or languages that are linguistically proximate. However, it does not appear to be influenced merely by countries speaking a common language. We also observe that common native language, which indicates ethnic ties and trust, is the strongest predictor of FDI. This association is driven mainly by countries sharing English as the native language, but not by countries sharing the same non-English European native languages.