Leaders’ Foreign Travel and Foreign Investment Inflows

This paper examines the effect of foreign travel by the leader or the head of state on the ability of the country to attract foreign capital, as reflected by foreign direct investment inflows. The key difficulty in determining a causal effect is the issue of endogeneity. As much as the leader’s trips abroad may attract foreign capital inflows, it is also possible that leaders are tempted to visit countries known to have a high level of investment out of their borders. To deal with potential endogeneity, we introduce a novel instrumental variable. The instrument used is urban distance which is defined as the gap between the level of urban development in the country of the leader relative to that of the United States. The 2SLS shows that the leader’s trips variable, instrumented by urban distance, has a statistically significant negative coefficient. This is the case even after the inclusion of other control variables and after using alternative samples. This result implies that these costly trips by the leaders can crowd out spending on the infrastructure needed for foreign investment, and can signal lack of seriousness by the leaders in spending on the implementation of reforms needed to attract foreign capital.