Internet externalities and location of foreign direct investment: A comparison between developed and developing countries

This paper presents a two-stage game, which demonstrates that positive (negative) network externalities associated with Internet usage encourage (discourage) foreign direct investment (FDI). These hypotheses are tested by two major empirical methodologies-the panel data regressions and the system general method of moments estimator. The empirical findings provide strong evidence that the presence of negative network externalities in developing countries discourages inward FDI, and the presence of positive network externalities in developed countries attracts more FDI. In addition, positive network externalities are found to be more effective than negative network externalities in reducing the distance effect on FDI. As well, the evidence suggests that Internet development is likely to reduce the impact of the initial concentration of FDI, but is unlikely to reverse the self-reinforcing process of FDI. (c) 2006 Elsevier B.V. All rights reserved.