THE ROLE OF PSYCHIC DISTANCE ON FDI FLOWS FROM THE SOUTH TO THE EAST OF EUROPE

The purpose of this paper is to examine the influence of psychic distance stimuli on foreign direct investment flows from countries located in the South of Europe towards the new members of European Union from Central and Eastern Europe. By applying panel data techniques, evidence of a negative relation is obtained for distance in democracy, whereas a positive one is obtained for per capita GDP and distance in education and industrial development, which demonstrates that these investment flows are characterized by an efficiency-seeking approach and low educational and technical requirements. This FDI motivation prompts firms to maximize cost advantages such as reduced salaries or input prices. Also interestingly, political risk does not seem an obstacle, in accordance with recent literature on political capabilities. The conclusions highlight the relevance of policies designed to create the appropriate structures for training a qualified workforce, combining attention to present-day economic needs and a wish to avoid a possible foreign investment dependence that generates few positive externalities for the host country.