Trust and Foreign Direct Investment: A Panel Data Study

Does social trust attract foreign direct investment? We construct an annual trust index for 140 economies from 1984 to 2023 using factor analysis of institutional, social-cohesion, and socioeconomic indicators. Fixed-effects, high-dimensional fixed-effects, and Bartik-type instrumental-variable estimates indicate that higher trust is associated with greater inward FDI. The relationship is more pronounced in OECD economies, while subgroup analysis suggests a stronger effect among economies with intermediate baseline trust. Decomposition results show that social cohesion is consistently significant, whereas socioeconomic conditions are not. These findings highlight social cohesion as the most robust dimension linking trust-related conditions to cross-economy differences in foreign investment.