Cultural distance, its dimensions, and their impact on foreign direct investment: an empirical analysis of OECD countries

Whether cultural differences hinder or facilitate foreign direct investment (FDI) remains unsettled, partly because conventional cultural-distance measures often combine the characteristics of the host country with bilateral cultural differences. This study examines whether host-country cultural characteristics and bilateral cultural distance are separately associated with inward FDI among OECD countries during 2015–2018. We employ two-dimensional cultural models that offer greater conceptual clarity and address documented measurement limitations of earlier cultural frameworks such as GLOBE and Hofstede. Using a gravity model estimated by Poisson pseudo-maximum likelihood (PPML), this study distinguishes host-country cultural ‘level’ effects from bilateral cultural ‘distance’ effects and additionally examines nonlinear distance relationships. The relationship between culture and FDI is not uniform across all dimensions. Some cultural characteristics, such as high levels of Self-Expression and Individualism in host countries, are associated with higher inward FDI, whereas others, such as Duty orientation and Flexibility, tend to be associated with lower inward FDI. Cultural distance is associated with friction in some dimensions and with investment-attracting complementarities in others. Policymakers should treat informal institutions—trust, tolerance and individual autonomy—as part of the investment climate, and investors should weigh a host country’s cultural profile more heavily than its cultural similarity to their own. This study highlights the role of national cultural characteristics in shaping countries’ attractiveness to foreign direct investment (FDI) within the OECD network. By applying modern two-dimensional cultural frameworks and distinguishing between host-country cultural characteristics and bilateral cultural distance, the analysis provides new insights into how culture is associated with international investment decisions. The findings indicate that the cultural environment of the host country is more consistently associated with inward FDI than cultural differences between investing and receiving countries in OECD countries. Cultural traits reflecting openness, individual autonomy, and Self-Expression are significantly associated with higher inward FDI, whereas cultural orientations emphasizing duty, restraint, or long-term caution tend to be associated with lower investment attractiveness among OECD countries. Importantly, the results suggest that cultural distance does not systematically hinder investment in OECD countries, indicating that multinational firms operating in advanced economies may adapt effectively to moderate cultural differences. These findings have important implications for both policymakers and international business strategy. While economic and institutional factors remain central to investment decisions, the results emphasize that cultural traits (informal institutions)—such as social trust, tolerance, and openness—also shape the investment climate. Policymakers seeking to attract foreign capital should therefore recognize that cultural and social environments can complement formal economic policies in promoting international investment. By showing how different cultural value clusters are associated with FDI patterns, this study contributes to a more nuanced understanding of the interaction between culture and global economic integration.