Original scientific paper
https://doi.org/10.18045/zbefri.2026.1.10
Friendship Paradox in Investment: How Diplomatic Proximity Affects FDI Inflows
Nevena Veselinović
; University of Kragujevac, Institute for Information Technologies
*
Filip Ž. Bugarčić
; University of Kragujevac, Faculty of Economics
* Corresponding author.
Abstract
This study examines whether bilateral diplomatic proximity between Serbia and FDI origin countries is positively or negatively associated with foreign direct investment (FDI) inflows. Using an augmented gravity model and a dynamic panel (System GMM) specification, it introduces a political proximity index (sScore) capturing foreign-policy similarity and geopolitical alignment alongside standard economic determinants; a squared term is added as an exploratory check for non-linearity. The static models show a statistically significant negative association between diplomatic proximity and FDI, which remains negative but only marginally significant in the dynamic specification. Serbia thus tends to attract more investment from countries that are not its closest diplomatic partners, a pattern the paper calls the “friendship
paradox”. A policy simulation illustrates the magnitude of this association, while the evidence on non-linearity is treated as secondary. The findings indicate that economic fundamentals and partner-country investment capacity are more decisive for FDI than diplomatic proximity, since Serbia’s closest partners are often capital-scarce economies. The study concludes that diplomatic proximity should be analysed in conjunction with economic fundamentals and partner-country capital capacity, rather than presumed to increase investment on its own. These results are country-specific and should be interpreted as conditional associations rather than causal effects.
Keywords
foreign direct investment; diplomatic proximity; geopolitical alignment; gravity model; Serbia
Hrčak ID:
348636
URI
Publication date:
30.6.2026.
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