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Trade-FDI Linkages in a Simultaneous Equations System of Gravity Models for German Regional Data

In: Empirical Modelling in Regional Science

Author

Listed:
  • Timo Mitze

    (Rheinisch-Westfälisches Institut für Wirtschaftsforschung)

Abstract

We analyze the nature of German trade-FDI linkages within the EU27 for a system of gravity equations, modelling imports, exports, inward and outward FDI stocks. Using regional data, we are able to estimate both aggregate as well as regionally disaggregated specifications. Our identification strategy rests upon the idea that we are able to identify long-run trade and FDI correlations in a flexible gravity approach, which allows us to control for common factors driving internationalization. Starting from the macroeconomic perspective, our analysis supports earlier empirical evidence for Germany in finding substitutive links between trade and outward FDI. However, switching to the (macro-)regional perspective, we reveal additional correlations, which can be motivated by recent theoretical approaches. For example, West German to EU27 trade-FDI linkages closely follow New Trade Theory models predicting export replacement effects of FDI. However, at the same time, outward FDI are found to stimulate trade via reverse good imports. For the West German to EU15 sub-aggregate, we reveal complementaries among export and outward FDI activity likely driven by a greater degree of similarity in the respective levels of development. On the contrary, for the East German economy, we mainly get substitutive linkages of EU wide trade and FDI. This regional heterogeneity emphasizes the need to take into account the regional dimension in analyzing cross-variable linkages between trade and FDI.

Suggested Citation

  • Timo Mitze, 2012. "Trade-FDI Linkages in a Simultaneous Equations System of Gravity Models for German Regional Data," Lecture Notes in Economics and Mathematical Systems, in: Empirical Modelling in Regional Science, edition 127, chapter 0, pages 123-164, Springer.
    • Handle: RePEc:spr:lnechp:978-3-642-22901-5_5
    DOI: 10.1007/978-3-642-22901-5_5
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    Cited by:

    1. Mariam Camarero & Estrella Gómez-Herrera & Cecilio Tamarit, 2018. "New Evidence on Trade and FDI: how Large is the Euro Effect?," Open Economies Review, Springer, vol. 29(2), pages 451-467, April.
    2. Harald Badinger & Jesus Crespo Cuaresma, 2015. "Aggregravity: estimating gravity models from aggregate data," Applied Economics, Taylor & Francis Journals, vol. 47(20), pages 2119-2126, April.
    3. Rodolfo Metulini & Massimo Riccaboni & Paolo Sgrignoli & Zhen Zhu, 2017. "The Indirect Effects of FDI on Trade: A Network Perspective," Working Papers 04/2017, IMT School for Advanced Studies Lucca, revised Mar 2017.
    4. Mariam Camarero & Laura Montolio & Cecilio Tamarit, 2019. "Determinants of German outward FDI: variable selection using Bayesian statistical," Working Papers 1906, Department of Applied Economics II, Universidad de Valencia.
    5. Xuan Wei & Suzanne Thornsbury & David Schweikhardt, 2017. "Hurdles to Exporting: A Decomposition of Fixed Export Costs," Review of Economics & Finance, Better Advances Press, Canada, vol. 7, pages 1-18, February.
    6. Mariam Camarero & Laura Montolio & Cecilio Tamarit, 2019. "Alternative Estimators For The Fdi Gravity Model: An Application To German Outward Fdi," Working Papers 1907, Department of Applied Economics II, Universidad de Valencia.
    7. Schmeiser, Katherine N. & Ricaurte, Miguel F., 2012. "Tradability and market penetration costs: Explaining foreign market servicing intensities," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 190-200.
    8. Idrisova, Vittoria (Идрисова, Виттория), 2017. "Determinants of Value-Added Exports: The Role of Import Demand Factors [Детерминанты Экспорта Добавленной Стоимости: Роль Факторов Спроса На Импорт]," Working Papers 051715, Russian Presidential Academy of National Economy and Public Administration.
    9. Tiba, Sofien & Frikha, Mohamed, 2018. "Income, trade openness and energy interactions: Evidence from simultaneous equation modeling," Energy, Elsevier, vol. 147(C), pages 799-811.
    10. Bassem Kahouli & Anis Omri & Anissa Chaibi, 2014. "Environmental Regulations, Trade, and Foreign Direct Investment: Evidence from Gravity Equations," Working Papers 2014-189, Department of Research, Ipag Business School.
    11. Kahouli, Bassem & Omri, Anis, 2017. "Foreign direct investment, foreign trade and environment: New evidence from simultaneous-equation system of gravity models," Research in International Business and Finance, Elsevier, vol. 42(C), pages 353-364.
    12. Mitze, Timo & Breidenbach, Philipp, 2018. "Economic integration and growth at the margin: A space-time incremental impact analysis," Ruhr Economic Papers 775, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    13. Dong Phong Nguyen & Xuan Vinh Vo, 2017. "Determinants of bilateral trade: evidence from ASEAN+3," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 31(2), pages 115-122, November.
    14. Camarero, Mariam & Montolio, Laura & Tamarit, Cecilio, 2019. "What drives German foreign direct investment? New evidence using Bayesian statistical techniques," Economic Modelling, Elsevier, vol. 83(C), pages 326-345.
    15. Schmeiser, Katherine N., 2013. "The firm export and FDI choice in the context of gravity," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 592-596.
    16. Rodolfo Metulini & Massimo Riccaboni & Paolo Sgrignoli & Zhen Zhu, 2017. "The indirect effects of foreign direct investment on trade: A network perspective," The World Economy, Wiley Blackwell, vol. 40(10), pages 2193-2225, October.

    More about this item

    Keywords

    Gravity Model; Relative Factor Endowment; East German State; Overidentification Test; East German Economy;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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