GRAVITY MODELING OF REGIONAL FDI DISPERSION

Application of the Newton’s law of gravity is one of the most used tools for empirical examination of international trade flows. The gravity formula can be also used in the case of FDI, which has become an important source of economic growth since the mid-20th century. In this paper, gravity approach will be applied for modeling FDI flows between Croatia and main trading partners. Special emphasis will be laid upon CEFTA 2006 countries. Although Croatian CEFTA membership ended in July 2013 as Croatia joined the EU, this regional integration still remains the key element for strengthening Croatian investment position. Therefore, examination of regional patterns of Croatian FDI inflows and outflows will be a focal point of this paper. By using an OLS method, the analysis showed that Croatian FDI inflows generally suit the fundamental assumptions of the gravity model, whereas in the case of Croatian FDI outflows, the gravity formula does not work. Also, belonging to the CEFTA 2006 does not have any effect neither on the FDI inflows nor on the FDI outflows. Additional analysis has included offshore financial centers (OFC) in order to examine in which way it affects Croatian FDI flows. The results showed that FDI flows in and from tax heavens are higher than gravity model assumes.