A Gravity Model Analysis of FDI across EU Member States
31 Aug 2020-Journal of Economic Integration (Center for Economic Integration)-Vol. 35, Iss: 3, pp 426-456
TL;DR: In this article, the authors investigated specific factors in explaining FDI inflows, with a focus on the new member EU states, and verified that EU membership has a positive and significant effect on FDI, between 1991 and 2017.
Abstract: While recent debates about European integration focus mainly on the losses from dissolutions, a remarkable rise in foreign direct investment (FDI) in the accession countries has become increasingly evident as a benefit of the European Union (EU) membership, which makes EU membership a key FDI determinant.B y applying an augmented gravity model (rather than standard gravity variables), covering 39 host and home countries over 1991-2017, we investigated specific factors in explaining FDI inflows, with a focus on the new member EU states.E mpirically, we created a series of ordinary least squares and Poisson Pseudo-Maximum-Likelihood models to account for all country-time-specific and country-pair factors.T his paper verifies that EU membership has a positive and significant effect on FDI, between 1991 and 2017 FDI inflows became greater, on average, by approximately 23%.A fter EU enlargement, more FDI came from EU members to the new EU member countries and less came from non-EU member countries.
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TL;DR: In this article, a dynamic multi-country trade model with foreign direct investment (FDI) in the form of non-rival technology capital is developed, with accumulation/decumulation of phyisical and technology capital in transition to the steady state.
Abstract: We develop a dynamic multi-country trade model with foreign direct investment (FDI) in the form of non-rival technology capital. The model nests structural gravity subsystems for FDI and trade, with accumulation/decumulation of phyisical and technology capital in transition to the steady state. The empirical importance of the FDI channel is demonstrated comparing actual aggregate cross-section data for 89 countries in 2011 to a hypothetical world without FDI. The gains from FDI amount to 9% of world’s welfare and to 11% of world’s trade, unevenly distributed among winners and losers. Net exports of FDI substitute for export trade in the results.
18 citations
TL;DR: In this article , a series of gravity models are estimated, using as a dependent variable the agri-food exports of 15 Latin American countries to their 185 principal trading partners, based on the gravity theory of trade, according to which, trade between two countries is determined by the size of both of their markets and their transport costs.
Abstract: This study analyses the causes of the strong growth in the agri-food exports of Latin America between 1994 and 2019. To do this, a series of gravity models are estimated, using as a dependent variable the agri-food exports of 15 Latin American countries to their 185 principal trading partners. The empirical specification is based on the gravity theory of trade, according to which, trade between two countries is determined by the size of both of their markets and their transport costs. Other variables have also been included, considering the theoretical foundations proposed for the gravity model. We initially used the PPML estimator since it is the method that provides estimates with the best properties. We later compared these results with those obtained through OLS and the Heckman selection model. Our findings show that the growth in agri-food exports is explained by factors of both supply and demand, but that the latter plays a more important role since we have obtained evidence of a reverse home-market effect. Furthermore, we can conclude that the creation of regional trade agreements, such as NAFTA, MERCOSUR, CACM, APEC, and TPP, has significantly favoured agri-food exports in the region.
4 citations
TL;DR: The authors investigated the impact of European Union (EU) integration on capital flows to prospective new EU member states using annual data between 1992 and 2020, and found that although EU integration increased net capital flows before the Global Financial Crisis (GFC), it was not able to shield countries from the general decline in capital flows that occurred after the GFC.
1 citations
TL;DR: This article examined determinants of dairy-product trade by applying the Poisson pseudo-maximum likelihood (PPML) method to the gravity model using panel data on 49 exporting and 235 importing countries for the 17 years from 2000 to 2016.
Abstract: Given the recent changes in the supply and demand of dairy products, many opportunities arise for exporting and importing countries. This paper examines determinants of dairy-product trade by applying the Poisson Pseudo-Maximum Likelihood (PPML) method to the gravity model using panel data on 49 exporting and 235 importing countries for the 17 years from 2000 to 2016. The gravity model is estimated using both interval data and dynamic analyses. The results show that domestic subsidies have a modest, but significant, impact on dairy-product trade across the models. For example, a 1% increase in subsidies leads to a roughly 0.02% increase in trade for an average country. Memberships in trade agreements, market size factors, and government institutions also positively affect dairy-product trade. However, tariffs are insignificant in the main model specification. Results from the lag-policy analysis show that the impact of subsidies disappears after the second year of distribution; whereas for the lead-policy analysis, results suggest at least 3 years of anticipatory effects on domestic subsidies.
1 citations
TL;DR: In this article , the influence of institution quality on foreign direct investment (FDI) outflows is investigated. But, the authors only identify a positive influence of the level of institutional development on FDI outflows for the institutionally developed countries.
Abstract:
This study focuses on the influence of institution quality on foreign direct investment (FDI) outflows. For empirical estimation, we use a dataset covering 102 home and 67 host countries from 2001 to 2016. We use the gravity approach and apply the Poisson pseudo maximum likelihood method to derive unbiased estimates. A set of institutional variables in a country is integrated into a single institutional index using principal component analysis. Our main findings are the following. First, we only identify a positive influence of the level of institutional development on FDI outflows for the institutionally developed countries. Second, we have not found evidence for crowding out national investment in the countries with weak institutions. Third, increases in the level of institutions stimulate horizontal rather than vertical outward FDI in an economy. Finally, institutional distance negatively affects the level of outward FDI only when the institutional distance between the two countries is large. The policy implications of this research are strongly in favour of further developing institutions.
References
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TL;DR: This article showed that the gravity model usually estimated does not correspond to the theory behind it and showed that national borders reduce trade between the US and Canada by about 44% while reducing trade among other industrialized countries by about 30%.
Abstract: The gravity model has been widely used to infer substantial trade flow effects of institutions such as customs unions and exchange rate mechanisms. McCallum [1995] found that the US-Canada border led to trade between provinces that is a factor 22 (2,200%) times trade between states and provinces, a spectacular puzzle in light of the low formal barriers on this border. We show that the gravity model usually estimated does not correspond to the theory behind it. We solve the 'border puzzle' by applying the theory seriously. We find that national borders reduce trade between the US and Canada by about 44%, while reducing trade among other industrialized countries by about 30%. McCallum's spectacular headline number is the result of a combination of omitted variables bias and the small size of the Canadian economy. Within-Canada trade rises by a factor 6 due to the border. In contrast, within-US trade rises 25%.
6,043 citations
"A Gravity Model Analysis of FDI acr..." refers background or result in this paper
...This result is in line with the most popular papers of the gravity models (Anderson & Wincoop, 2003; Silva & Tenreyro, 2006; Blonigen & Piger, 2014)....
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...Our first model does not include unobservable country-specific factors and the remoteness of the host country from another, the multilateral resistances (MRs) (Anderson & Wincoop, 2003)....
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TL;DR: In this paper, the authors address the endogeneity of free trade agreements using instrumental-variable (IV) techniques, control function (CF) techniques and panel-data techniques; IV and CF approaches do not adjust for endogeneity well, but a panel data approach does.
2,163 citations
"A Gravity Model Analysis of FDI acr..." refers background in this paper
...The most influential study in this area comes from Baier and Bergstrand (2007), who first designed a panel data FDI analysis and showed that an instrumental variable approach is not sufficient due to the endogeneity issue....
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...Also as emphasized by Baier and Bergstrand (2007), we found a non-significant and negative coefficient of EU_lead, confirming the absence of reverse causality between FDI and EU membership....
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01 Jan 1977
TL;DR: In this article, the authors discuss ways in which production financed by foreign direct investment, that undertaken by multinational enterprises (MNEs), has affected our thinking about the international allocation of resources and the exchange of goods and services between countries.
Abstract: The main task of this paper is to discuss ways in which production financed by foreign direct investment, that is, that undertaken by multinational enterprises (MNEs), has affected our thinking about the international allocation of resources and the exchange of goods and services between countries. The analysis takes, as its starting point, the growing convergence between the theories of international trade and production, and argues the case for an integrated approach to international economic involvement, based both on the location-specific endowments of countries and the ownership-specific endowments of enterprises. In pursuing this approach, the paper sets out a systemic explanation of the foreign activities of enterprises, in terms of their ability to internalise markets to their advantage. It concludes with a brief examination of some of the effects which the MNE is allegedly having on the spatial allocation of resources, and on the patterns of trade between countries.
2,137 citations
TL;DR: In this paper, the authors focus on international investment and international trade in the product cycle and argue that it is a mistake to assume that equal access to scientific principles in all the advanced countries means equal probability of the application of these principles in the generation of new products.
Abstract: Publisher Summary This chapter focuses on international investment and international trade in the product cycle. It is a mistake to assume that equal access to scientific principles in all the advanced countries means equal probability of the application of these principles in the generation of new products. There is ordinarily a large gap between the knowledge of a scientific principle and the embodiment of the principle in a marketable product. An entrepreneur usually has to intervene to accept the risks involved in testing whether the gap can be bridged. The United States' market offers certain unique kinds of opportunities to those who are in a position to be aware of them. The market consists of consumers with an average income that is higher than that in any other national market, and is characterized by high unit labor costs and relatively unrationed capital compared with practically all other markets. As the demand for a product expands, a certain degree of standardization usually takes place. A commitment to some set of product standards opens up technical possibilities for achieving economies of scale through mass output, and encourages long-term commitments to some given process and some fixed set of facilities.
1,857 citations
"A Gravity Model Analysis of FDI acr..." refers background in this paper
...One of them is the theory of product life cycle, which was developed by Vernon (1966)....
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Posted Content•
TL;DR: The authors empirically investigated the role of transport costs, trade and investment barriers, production scale economies, and firm-specific advantages in determining the use of overseas production relative to exports, and found that the effect of freight factors on the level of affiliate sales is not robust.
Abstract: This paper empirically investigates the role of transport costs, trade and investment barriers, production scale economies, and firm- specific advantages in determining the use of overseas production relative to exports. The proximity-concentration hypothesis is robust in explaining the share of total sales accounted for by affiliate sales: this share is greater the higher are transport costs and trade barriers and the lower are plant scale economies and investment barriers. Although strictly speaking, the proximity-concentration hypothesis applies to the shares of affiliate sales and exports rather than the levels, the effects of trade and investment barriers on the levels are similar to their effects on the shares, controlling for simultaneity, and so is that of freight factors in the trade estimates. The elasticity of inward and outward net affiliate sales with respect to tariffs is around 0.45, and that with respect to NTBs is an additional 0.17. The elasticity of both imports and exports with respect to freight factors is -1. However, the effect of freight factors on the level of affiliate sales is not robust, and the probability of observing any affiliate sales is increasing in proximity. The overall complementarity between trade and affiliate sales arises in part because relative income and intellectual property intensity increase both. In contrast, affiliate sales and trade move in opposite directions with increases in advertising intensity, suggesting that advertising-intensive products require a local presence.
1,522 citations
"A Gravity Model Analysis of FDI acr..." refers background in this paper
...of view, we extended the FDI literature (Brainard, 1997; Dellis, Sondermann, & Vansteenkiste, 2017; Wong & Tang, 2011) and suggested a value of FDI flows as a dependent variable, which would also be more appropriate for measuring integration....
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...From this point of view, we extended the FDI literature (Brainard, 1997; Dellis, Sondermann, & Vansteenkiste, 2017; Wong & Tang, 2011) and suggested a value of FDI flows as a dependent variable, which would also be more appropriate for measuring integration....
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...…NMS. Consistent with the highly recommended trade papers (Anderson & Van Wincoop, 2003; Yotov et al., 2016) and FDI studies (Blonigen et al., 2007; Brainard, 1997; Pain, 1993; Welfens & Baier, 2018), we confirmed that the best fitting model for estimating determinants of bilateral FDI flows is a…...
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