Geographical distance drives shift from exports to foreign investments.
Firms choose between selling products in foreign countries by exporting or setting up local branches. The distance between countries affects this choice. When countries are far apart, firms tend to use Foreign Direct Investment (FDI) more. But when there are language or cultural differences, firms prefer exporting. Import tariffs also influence this decision, with higher tariffs leading to more FDI. Overall, different types of distance impact exports and FDI in different ways.