Location choice determinants of Chinese and US firms in Africa: Does spatial interdependence play a role?

In an increasingly integrated global market, the nature and extent of spatial interdependence is one key factor influencing firms’ location decisions. Spatial interdependence often manifests itself in the form of agglomeration or congestion effects, not just within a country but also in a region. Using Chinese and US overseas investment data, this study presents empirical evidence on the role that neighbouring countries (third-country effects) play in attracting Foreign Direct Investment (FDI) to a host country. The study's findings show that there is evidence of spatial interdependence both for Chinese and USA FDI flows to African countries. For both countries, the third country effects come through either explanatory variables (including market size, domestic credit, trade costs and the share of service sector), error term or the amount of FDI in neighbouring countries. The findings also show that there is more robust evidence that, unlike Chinese FDI, the US FDI takes into account the market potentials of not just a host country but also that of a neighbouring country in making investment location decisions.