services could foster growth of regional value chains. The above effects could, however, vary significantly across countries depending on countries’ business environment and absorptive capacity.

In this paper, we first document and compare the historical patterns of FDI around the world including BRI and non-BRI countries and investigate how different types of transportation cost and infrastructure have affected FDI. Based on the findings, we then assess the potential roles of BRI in fostering FDI growth by improving different types of connectivity and infrastructure. Finally, we evaluate the effects of FDI on economic growth and how BRI might potentially affect economic growth through the foreign investment channel.

The structure of this paper is as follows. Section 2 reviews the existing literature evaluating the patterns, determinants, and effects of FDI as well as existing analysis on BRI. Section 3 discusses the data sources and the patterns emerging from the data. Section 4 describes the econometric methodology and the empirical findings. Section 5 concludes.

# 2. Literature Review

# 2.1 The Patterns of FDI and the Role of Transportation Cost

An extensive volume of empirical literature in international trade has examined the patterns of FDI as a function of country characteristics including market size, factor endowment, transportation cost, tariff, and other factors such as corporate tax, institutional quality and exchange rate.

The literature shows that the relationship between transportation cost and FDI varies sharply with the nature and type of investment, in particular, between horizontal and vertical/complex FDI. To measure transportation cost, distance or a ratio of cost, insurance and freight (cif) relative to free-onboard import value has usually been used while it is widely acknowledged that distance could capture not only various forms of geographic friction including the costs of communication and monitoring but also other factors such as cultural distance and historical ties (see, for example, Head and Mayer, 2013).

The first stream of studies presents evidence that is in alignment with horizontal FDI by showing a positive relationship between FDI on the one hand and market size and trade cost on the other. Brainard (1997), one of the first empirical studies examining the proximity-concentration trade-off, finds that the patterns in which country characteristics relate to U.S. FDI are broadly in alignment with the market access motive. Specifically, she uses U.S. trade and affiliate sales data from the 1989 BEA Benchmark Survey of U.S. Direct Investment Abroad and finds that FDI increases with hostcountry income and trade cost including the transportation cost to ship goods between the headquarters country and the host country, consistent with the market access motive in horizontal FDI.

Similar findings are shown in Carr, Markusen, and Maskus (2001) who incorporate both horizontal and vertical FDI into a knowledge-capital model of multinational firms and offer support to both market access and knowledge capital hypotheses. In particular, the elasticity of affiliate sales with respect to distance is estimated to range from -0.8 to -1.8, suggesting strong gravity in FDI patterns. Affiliate sales tend to diminish by around 8 to 18 percent when the distance between parent and 4