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Estimating Trade and Investment Flows: Partners and Volumes

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  • Alessandro Barattieri

Abstract

I present a new stylized fact from a large sample of countries for the period 2000-2006: bilateral foreign direct investment (FDI) flows are almost never observed in the absence of bilateral trade flows. I document a similar pattern using bilateral foreign affiliate sales (FAS), aggregating them up from a large firm level dataset (ORBIS), which includes over 45,000 firms. I propose a model where heterogeneous firms can decide whether to serve foreign markets through export or FDI. I derive theory-based gravity-type equations for the aggregate bilateral trade and foreign affiliate sales (FAS) flows. I then suggest a two-stage estimation procedure structurally derived from the model. In the first stage, an ordered Probit model is used to retrieve consistent estimates of the terms needed to correct the flows equations for firms’ heterogeneity and selection into exports and FDI. In the second stage, a maximum likelihood estimator is applied to the corrected trade and FAS equations. The main results of the analysis are as follows: 1) The impact of distance, border and regional trade agreements on the amount bilateral foreign affiliate sales becomes substantially smaller after controlling for selection and firms’ heterogeneity (hence separating the impact on the extensive versus the intensive margin). 2) The same “attenuation” result is found also for the trade equations, consistently with previous literature. 3) When FAS are observed, failing to take this into account when correcting for heterogeneity and selection in the trade equations does not leads to significant differences in the estimated coefficients.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 1133.

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Date of creation: 2011
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Handle: RePEc:lvl:lacicr:1133

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Keywords: Trade Flows; Investment Flows; Gravity; Two-stage Estimation Procedure;

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References

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  1. Bergstrand, Jeffrey H. & Egger, Peter, 2007. "A knowledge-and-physical-capital model of international trade flows, foreign direct investment, and multinational enterprises," Journal of International Economics, Elsevier, vol. 73(2), pages 278-308, November.
  2. Huiwen Lai & Susan Chun Zhu, 2006. "U.S. Exports and Multinational Production," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 531-548, August.
  3. Joshua Aizenman & Mark M. Spiegel, 2002. "Institutional Efficiency, Monitoring Costs, and the Investment Share of FDI," NBER Working Papers 9324, National Bureau of Economic Research, Inc.
  4. Natalia Ramondo & Andrés Rodríguez-Clare, 2009. "Trade, Multinational Production, and the Gains from Openness," NBER Working Papers 15604, National Bureau of Economic Research, Inc.
  5. Keith Head & John Ries & Thierry Mayer, 2008. "The erosion of colonial trade linkages after independence," Sciences Po publications 6951, Sciences Po.
  6. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  7. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2006. "Trading Partners and Trading Volumes," DEGIT Conference Papers c011_022, DEGIT, Dynamics, Economic Growth, and International Trade.
  8. Aisbett, Emma, 2007. "Bilateral investment treaties and foreign direct investment : correlation versus causation," CUDARE Working Paper Series 1032R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
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Cited by:
  1. Buch, Claudia M. & Koch, Cathérine T. & Koetter, Michael, 2014. "Should I stay or should I go? Bank productivity and internationalization decisions," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 266-282.

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