Home Country Bias in Foreign Direct Investment

This chapter analyses in what sense and why the aggregate level of foreign direct investment is lower than might be anticipated. It begins by pointing out the ambiguities of definition and the limitations of the estimates made of FDI. It goes on to explore the degree to which all economic actors, whether they are individuals, governments or companies, prefer their own. This applies to where a person works, where he/she places savings, or to the origin of the goods and services consumed by that person. It also applies to where a company invests in productive facilities, who it employs and where it purchases. It explores three arguments advanced to establish such a bias, analysing in turn the arguments based on deficiencies in market integration, the tendency for equality between national savings and national investment, and a pronounced domestic orientation in the composition of portfolios of financial assets. The chapter defines home country bias, indicates how it might be measured and seeks to explain it. It concludes by making a link between country risk and home country bias in FDI.