Distance, trade and FDI: a Hausman-Taylor SUR approach

This paper analyses the effects of distance as a common determinant of exports and FDI in a three-factor New Trade Theory model, assuming that distance affects both pure trade costs and plant set-up costs. Exports and FDI are not necessarily substitutes with respect to distance, since the predicted...

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Bibliographic Details
Published in:Journal of applied econometrics (Chichester, England) England), 2004-03, Vol.19 (2), p.227-246
Main Authors: Egger, Peter, Pfaffermayr, Michael
Format: Article
Language:English
Subjects:
Bilateralism
Costs
Econometrics
Economic costs
Economic models
Economic theory
Empirical research
Endowment
Endowments
Exporters
Exports
Foreign direct investment
Foreign investment
Human capital
International trade
Multinational corporations
Multinational enterprises
Structural capital
Studies
Trade
Transport costs
Transportation costs
US exports
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Summary:This paper analyses the effects of distance as a common determinant of exports and FDI in a three-factor New Trade Theory model, assuming that distance affects both pure trade costs and plant set-up costs. Exports and FDI are not necessarily substitutes with respect to distance, since the predicted impact depends on its importance for fixed plant set-up costs relative to transportation costs and on the relative importance of vertical MNEs. For the empirical specification, we suggest that the impact of time-invariant variables such as distance is most appropriately analysed in a Hausman-Taylor SUR model. We apply our model to industry-level data of bilateral outward FDI stocks and exports of the US and Germany.
ISSN:0883-7252
1099-1255
DOI:10.1002/jae.721