Do National Borders Matter? Distance as FDI Determinant: The Case of Serbia

The aim of this chapter is to define the meaning and the role of distance in determining cross-border investment transactions. Specifically it aims, using Serbia as an individual country case at demonstrating the implementation of a model based on Ghemawat's cultural, administrative, geographic and economic (CAGE) distance framework for testing the key distance-related determinants of the foreign direct investment (FDI) inflows to a country. Since 2000 Serbia has embarked on an extensive political and economic reforms programme, having achieved democratic stability by now. Its economic growth has been mainly driven by foreign direct investments. This chapter analyses how each one of distance dimensions, i.e. cultural, administrative, geographic and economic, affects FDI inflows to Serbia. The empirical application of the model shows that cultural distance affects FDI flows negatively, while administrative, geographic and economic distance have a positive effect on FDI inflows to Serbia.