Logistics performance of the source-host pair is also found to be matter: a one-percent increase in the logistics performance index leads to 0.1 to 0.2 percent increase in FDI flows.

Most other country characteristics including market size, contiguity, common language, and colonial ties are also found to exert expected effects. Countries with a larger market size not only attract more FDI but also invest more abroad. Country pairs with contiguity, common languages, or colonial ties are also shown to have greater investment flows. However, the PTA depth is found in Table 9 to have only a weakly positive effect on FDI.

In Table 10, we repeat the analysis using a Poisson Pseudo Maximum Likelihood (PPML) Estimator following Santos Siliva and Tenreyro (2006) to address the zero FDI values in the data sample. The results are qualitatively similar. Both air transportation and land transportation costs, proxied by either distance or driving time, have a significant and negative effect on FDI flows. The effect of sea distance is largely insignificant. The PTA depth in this table is found to be positively and significantly associated with FDI flows, suggesting that deeper trade agreements that cover more provisions have a stronger effect on FDI flows.

We also separately examine FDI flows from OECD source countries using a longer time series of OECD FDI statistics. The results on transportation costs shown in Table 11 are qualitatively similar to Table 9. The elasticities of FDI with respect to air distance, driving distance, and driving time are found to be all around -1 for OECD source countries. The elasticity of FDI with respect to sea distance is also found negative and significant, albeit much smaller in magnitude and around -0.1. OECD countries’ FDI outflows are also responsive to host countries’ airway and port qualities, but insignificantly related to railway. The PTA depth exerts a significant and positive effect on OECD countries’ FDI flows.

<mark>Next, we explore how the effects of distances have evolved over time given the technological improvements in transportation. To do so, we interact the three transportation measures with a vector of dummies that divide the time series into six 5-year windows and allow the distance elasticity of FDI to vary over time. The results are reported in Table 12 and Figure 17. We find that while the sea distance elasticity of FDI has remained stable in the last three decades, there has been a significant rise in the elasticities of FDI with respect to air distance and driving time, with the estimates nearly doubled. This result, in alignment with Feyrer (2009) which shows similar findings for trade, can be explained by the endogenous selection of goods into the different transportation mode and the increasing usage of air and railway transportation with the technological improvement in air and rail transportation and the proliferation of GVCs. Exporters tend to choose air and rail for goods that are more time sensitive and sea for goods that are less time sensitive. Hence, when there is a change in travel time, goods will respond more to travel time in air and railway than in sea. Over time, with falling air and rail transportation costs and an increasing prevalence of GVCs and intermediate trade, more exports are carried out by air and rail than sea, leading to a growing importance of air and land transportation cost in FDI growth.</mark> 27