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The Role of Geography in Financial and Economic Integration: A Comparative Analysis of Foreign Direct Investment, Trade and Portfolio Investment Flows

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  • Selen Sarisoy Guerin
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    Abstract

    The objective of this paper is to examine the role of geography in explaining the patterns of financial and economic integration among both developed and developing countries. Using a gravity model, we compare North-North, North-South and South-North FDI, trade and portfolio investment flows to examine how geographical factors influence these bilateral flows. The results indicate that the impact of geography variables on FDI and portfolio are similar to their effect on trade. Geography variables have a statistically significant effect both on FDI and portfolio investment, but FDI is more sensitive to distance. We interpret the negative effect of distance as the existence of information costs in financial flows. Also bilateral FDI, trade and portfolio investment flows react to macroeconomic fundamentals in the same way, however, with different degrees of sensitivity. There are significant differences between North-North and North-South flows. Our results find support for the argument that most FDI among industrial countries are horizontal, whereas most FDI investment in developing countries is vertical. The fact that the significance of geographical variables on financial flows still remained even after controlling for the macroeconomic fundamentals, is in contrast with the standard capital market model. The results can, however, be reconciled if geographical factors can proxy for information costs, which may in turn explain why country portfolios are still home-biased. The significant effect of distance on financial flows may also explain how idiosyn cratic shocks are spread (i.e. contagion) to other countries in the same region. Ultimately, the geographical location of a country may determine its economic and financial integration into the world economy. Copyright 2006 The Authors Journal compilation 2006 Blackwell Publishing Ltd .

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal World Economy.

    Volume (Year): 29 (2006)
    Issue (Month): 2 (02)
    Pages: 189-209

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    Handle: RePEc:bla:worlde:v:29:y:2006:i:2:p:189-209

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    Cited by:
    1. Alexandra Peter, 2012. "Bilateral Trade, Openness, and Asset Holdings," Open Economies Review, Springer, Springer, vol. 23(4), pages 713-740, September.
    2. Belkacem Laabas and Walid Abdmoulah, . "Determinants of Arab Intraregional Foreign Direct Investments," API-Working Paper Series 0905, Arab Planning Institute - Kuwait, Information Center.
    3. Feeny, Simon & Iamsiraroj, Sasi & McGillivray, Mark, 2014. "Growth and Foreign Direct Investment in the Pacific Island countries," Economic Modelling, Elsevier, Elsevier, vol. 37(C), pages 332-339.
    4. Joshua Aizenman & Ilan Noy, 2008. "Links between Trade and Finance: A Disaggregated Analysis," NBER Chapters, in: Financial Markets Volatility and Performance in Emerging Markets, pages 9-28 National Bureau of Economic Research, Inc.
    5. Abid, Fathi & Bahloul, Slah, 2011. "Selected MENA countries' attractiveness to G7 investors," Economic Modelling, Elsevier, Elsevier, vol. 28(5), pages 2197-2207, September.
    6. Badinger, Harald, 2009. "Globalization, the output-inflation tradeoff and inflation," European Economic Review, Elsevier, Elsevier, vol. 53(8), pages 888-907, November.
    7. Barbara Pfeffer, 2008. "Do regional Trade and Specialization drive intra-regional Risk-Sharing?," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 200813, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    8. Ezcurra, Roberto & Rodríguez-Pose, Andrés, 2013. "Does economic globalization a ffect regional inequality? A cross-country analysis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9557, C.E.P.R. Discussion Papers.
    9. Harald Badinger, 2012. "Measuring the World Economy," EcoMod2012 4028, EcoMod.
    10. Turan Subasat & Sotirios Bellos, 2013. "Governance and foreign direct investment in Latin America: A panel gravity model approach," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 50(1), pages 107-131, May.
    11. Philip R. Lane, 2008. "The Macroeconomics of Financial Integration: A European Perspective," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp265, IIIS.
    12. Stacie Beck & Alexis Chaves, 2011. "The Impacts of Various Taxes on Foreign Direct Investment," Working Papers, University of Delaware, Department of Economics 11-18, University of Delaware, Department of Economics.

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