A theory of the spatial distribution of foreign direct investment Avik Chakrabarti * University of Wisconsin-Milwaukee, 816 Bolton Hall, Milwaukee, WI 53201, USA Received 14 March 2000; received in revised form 15 July 2001; accepted 20 August 2001 Abstract The absence of a consensus on a theoretical framework to guide empirical work on foreign direct investment (FDI) is rather conspicuous. The contribution of this paper lies in developing a structural model to facilitate empirical analyses directed toward assessing the role of various potential determinants of the spatial distribution of FDI. The model presented in this paper combines elements of the trade literature on imperfect competition with the strategy literature on multinationals to derive an explicit solution for the distribution of FDI in terms of its potential determinants, allowing FDI to serve both the host-country market and the export market. It allows for product differentiation between final products by brand name as well as the country of origin and takes into account an environment that is subject to uncertainty in the appropriation of the potential revenue. D 2002 Elsevier Science Inc. All rights reserved. JEL classification: F1 Keywords: Foreign direct investment; International capital flow 1. Introduction Global flow of foreign direct investment (FDI) has grown fairly rapidly ever since the late 1980s. However, the cross-country distribution of FDI has remained highly skewed: the top fifth of the world enjoys 68% and the bottom fifth barely 1%. The industrialized nations have 1059-0560/02/$ – see front matter D 2002 Elsevier Science Inc. All rights reserved. doi:10.1016/S1059-0560(02)00111-9 * Tel.: +1-414-229-4680; fax: +1-414-229-3860. E-mail address: chakra@uwm.edu (A. Chakrabarti). International Review of Economics and Finance 12 (2003) 149 – 169