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The Global Disconnect: The Role of Transactional Distance and Scale Economies in Gravity Equations

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Author Info
Loungani, Prakash
Mody, Ashoka
Razin, Assaf

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Abstract

Recent empirical analyses show that asset flows can be modelled by the same "gravity" equations that trade economists have used so successfully for the past few decades. This is something of a surprise. Trade economists do not yet have a unified theory of why gravity models should work--and the situation is worse for asset flows. Reasonable theories would predict that greater distance between countries should generate more asset flows rather than less as the econometric results seem to consistently show. In this paper we discuss how host and source country GDPs, language, and distance--the core explanatory variables in the traditional gravity models--fare in trade and asset flows estimations. While the "distance puzzle" is not resolved, it is considerably reduced by going beyond consideration of physical distance to concepts of transactional distance and scale economies. Copyright 2002 by Scottish Economic Society.

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Publisher Info
Article provided by Scottish Economic Society in its journal Scottish Journal of Political Economy.

Volume (Year): 49 (2002)
Issue (Month): 5 (December)
Pages: 526-43
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Handle: RePEc:bla:scotjp:v:49:y:2002:i:5:p:526-43

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  1. Maureen Lankhuizen & Henri L.F. de Groot & Gert-Jan M. Linders, 2009. "The Trade-Off between Foreign Direct Investments and Exports: The Role of Multiple Dimensions of Distance," Tinbergen Institute Discussion Papers 09-050/3, Tinbergen Institute. [Downloadable!]
  2. Frank A.G. den Butter & Robert H.J. Mosch, 2003. "Trade, Trust and Transaction Cost," Tinbergen Institute Discussion Papers 03-082/3, Tinbergen Institute. [Downloadable!]
  3. Márquez-Ramos, Laura & Martínez-Zarzoso, Inmaculada, 2009. "The effect of technological innovation on international trade : a nonlinear approach," Economics Discussion Papers 2009-24, Kiel Institute for the World Economy. [Downloadable!]
  4. Antonin Aviat & Nicolas Coeurdacier, 2004. "The geography of trade in goods and asset holdings," DELTA Working Papers 2004-10, DELTA (Ecole normale supérieure). [Downloadable!]
  5. Pierre-Guillaume Méon & Anne-France Delannay, 2006. "The impact of European integration on the nineties’ wave of mergers and acquisitions," Working Papers DULBEA 06-12.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
  6. Claudia M. Buch & Jörn Kleinert & Farid Toubal, 2003. "Where Enterprises Lead, People Follow? Links between Migration and German FDI," Kiel Working Papers 1190, Kiel Institute for the World Economy. [Downloadable!]
  7. Fink, Carsten & Mattoo, Aaditya & Neagu, Ileana Cristina, 2002. "Assessing the impact of communication costs on international trade," Policy Research Working Paper Series 2929, The World Bank. [Downloadable!]
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  8. Giorgio Fazio & Tamim Bayoumi & Manmohan S. Kumar & Ronald MacDonald, 2003. "Fatal Attraction: A New Measure of Contagion," IMF Working Papers 03/80, International Monetary Fund. [Downloadable!]
  9. Assaf Razin & Efraim Sadka & Hui Tong, 2005. "Bilateral FDI Flows: Threshold Barriers and Productivity Shocks," NBER Working Papers 11639, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Assaf Razin & Yona Rubinstein & Efraim Sadka, 2004. "Fixed Costs and FDI: The Conflicting Effects of Productivity Shocks," NBER Working Papers 10864, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Assaf Razin & Yona Rubinstein & Efraim Sadka, 2003. "Which Countries Export FDI, and How Much?," NBER Working Papers 10145, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Yi-Hui Chiang & Yiming Li & Chih-Young Hung, 2007. "A Dynamic Growth Model for Flows of Foreign Direct Investment," DEGIT Conference Papers c012_047, DEGIT, Dynamics, Economic Growth, and International Trade. [Downloadable!]
  13. Christian Daude & Marcel Fratzscher, 2006. "The pecking order of cross-border investment," Working Paper Series 590, European Central Bank. [Downloadable!]
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  14. Katrin Elborgh-Woytek, 2003. "Of Openess and Distance: Trade Developments in the Commonwealth of Independent States, 1993-2002," IMF Working Papers 03/207, International Monetary Fund. [Downloadable!]
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