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Estimating the Impact of Time-Invariant Variables on FDI with Fixed Effects

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Author Info

  • Davies, Ronald B.

    (Department of Economics, Copenhagen Business School)

  • Ionascu, Delia

    (Department of Economics, Copenhagen Business School)

  • Kristjánsdóttir, Helga

    (Department of Economics, Copenhagen Business School)

Abstract

This paper applies the panel fixed effects with vector decomposition estimator to three FDI datasets to estimate the impact of time-invariant variables on FDI while including fixed effects. We find that the omission of fixed effects significantly biases several of these variables, especially those proxying for trade costs and culture. After including fixed effects, we find that many time-invariant variables indicate the importance of vertical FDI. We also find that by eliminating these biases, the differences across datasets largely disappear. Thus, controversies in the literature that are driven by differences in data sets may be resolved by using this estimation technique. JEL Classification: F14, F23 Key Words: Foreign Direct Investment, Trade Costs, Culture

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Bibliographic Info

Paper provided by Copenhagen Business School, Department of Economics in its series Working Papers with number 02-2007.

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Length: 38 pages
Date of creation: 01 Jan 2007
Date of revision:
Handle: RePEc:hhs:cbsnow:2007_002

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Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Phone: 38 15 25 75
Fax: 38 15 34 99
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Web page: http://www.cbs.dk/departments/econ/
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References

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  1. Badi H. Baltagi & Peter Egger & Michael Pfaffermayr, 2005. "Estimating Models of Complex FDI: Are There Third-Country Effects?," Center for Policy Research Working Papers, Center for Policy Research, Maxwell School, Syracuse University 73, Center for Policy Research, Maxwell School, Syracuse University.
  2. Andrew K. Rose, 2002. "Do We Really KNow that the WTO Increases Trade?," Working Papers 182002, Hong Kong Institute for Monetary Research.
  3. Mutti, John & Grubert, Harry, 2004. "Empirical asymmetries in foreign direct investment and taxation," Journal of International Economics, Elsevier, Elsevier, vol. 62(2), pages 337-358, March.
  4. Blonigen, Bruce A. & Davies, Ronald B. & Waddell, Glen R. & Naughton, Helen T., 2007. "FDI in space: Spatial autoregressive relationships in foreign direct investment," European Economic Review, Elsevier, Elsevier, vol. 51(5), pages 1303-1325, July.
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  14. Coughlin, Cletus C & Terza, Joseph V & Arromdee, Vachira, 1991. "State Characteristics and the Location of Foreign Direct Investment within the United States," The Review of Economics and Statistics, MIT Press, vol. 73(4), pages 675-83, November.
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  16. Robert J. Barro & Jong-Wha Lee, 2000. "International Data on Educational Attainment: Updates and Implications," CID Working Papers, Center for International Development at Harvard University 42, Center for International Development at Harvard University.
  17. Bruce A. Blonigen & Ronald B. Davies, 2004. "The Effects of Bilateral Tax Treaties on U.S. FDI Activity," International Tax and Public Finance, Springer, Springer, vol. 11(5), pages 601-622, 09.
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Citations

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Cited by:
  1. Markusen, James R., 2010. "Putting Per-Capita Income back into Trade Theory," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7790, C.E.P.R. Discussion Papers.
  2. Thomas O'Connor, 2014. "Legal bonding, investor recognition, and cross-listing premia in emerging markets," International Journal of Accounting and Finance, Inderscience Enterprises Ltd, Inderscience Enterprises Ltd, vol. 4(3), pages 209-239.
  3. Bojnec, Å tefan & Ferto, Imre, 2014. "Outward Foreign Direct Iinvestments and Merchandise Exports: The European OECD Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 87-99, June.
  4. Rodolphe Desbordes & Céline Azémar, 2010. "Short-Run Strategies For Attracting Foreign Direct Investment," Working Papers, University of Strathclyde Business School, Department of Economics 1005, University of Strathclyde Business School, Department of Economics.
  5. Wacker, Konstantin M., 2013. "On the measurement of foreign direct investment and its relationship to activities of multinational corporations," Working Paper Series, European Central Bank 1614, European Central Bank.
  6. Thomas O'Connor, 2012. "Investability, Corporate Governance and Firm Value," Economics, Finance and Accounting Department Working Paper Series, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth n223-12.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  7. Thomas Flavin & Thomas O'Connor, 2013. "The effects of ownership structure on corporate financing decisions: Evidence from stock market liberalization," Economics, Finance and Accounting Department Working Paper Series, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth n235-13.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  8. Jungmittag, Andre, 2014. "Der Trade-off zwischen deutschen Direktinvestitionen und Exporten: Wie wichtig sind die verschiedenen Dimensionen der Distanz?," Working Paper Series: Business and Law 04, Frankfurt University of Applied Sciences, Faculty of Business and Law.

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