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Fixed Costs, Foreign Direct Investment, and Gravity with Zeros

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  • Ronald B. Davies
  • Helga Kristjánsdóttir

Abstract

Fixed costs play a crucial role in current models of foreign direct investment (FDI), yet they are almost entirely ignored in empirical treatments of FDI. We fill this gap by using a 1989-2001 panel of FDI flows into Iceland to examine the determinants of fixed costs for multinational firms and how these influence aggregate patterns of investment. Our additions to research in the field include usage of several natural-resource variables, and the analysis of data on initial entry of FDI into a developed country. We use the Heckman two-step procedure, which allows us to account for fixed costs and their impact on estimation. Taken together, we find that the standard OLS approach to the data incorrectly links the quantity of FDI to source-country variables while in fact most of their role is in determining whether FDI takes place at all. Copyright � 2010 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 18 (2010)
Issue (Month): 1 (02)
Pages: 47-62

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Handle: RePEc:bla:reviec:v:18:y:2010:i:1:p:47-62

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Cited by:
  1. Eicher, Theo S. & Helfman, Lindy & Lenkoski, Alex, 2012. "Robust FDI determinants: Bayesian Model Averaging in the presence of selection bias," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(3), pages 637-651.
  2. Yuko Hashimoto & Konstantin Wacker, 2012. "The Role of Risk and Information for International Capital Flows," IMF Working Papers 12/242, International Monetary Fund.
  3. Hansson, Åsa & Olofsdotter, Karin, 2011. "Labor Taxation and FDI decisions in the European Union," Working Papers, Lund University, Department of Economics 2011:11, Lund University, Department of Economics.
  4. Boring, Anne, 2010. "Determinants of the United States’ trade of pharmaceuticals," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/4340, Paris Dauphine University.

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