The paper provides a reconciliation of Lucas' paradox, based on fixed setup costs of new investments. With such costs, it does not pay a firm to make a "small" investment, even though such an investment is called for by marginal productivity conditions. Using a sample of 45 developed and developing countries we estimate jointly the participation equation (the decision whether to invest at all) and the FDI flow equation (the decision how much to invest). We find that countries which are more likely to serve as source for FDI exports than their characteristics project export lower flow of FDI than is predicted by their characteristics. This negative correlation suggests that the source countries with relatively low setup costs are also those with high marginal productivity of capital
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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number
226.
Length: Date of creation: 2004 Date of revision: Handle: RePEc:red:sed004:226
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Find related papers by JEL classification: F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Barry Eichengreen & Douglas A. Irwin, 1998.
"The Role of History in Bilateral Trade Flows,"
NBER Chapters,
in: The Regionalization of the World Economy, pages 33-62
National Bureau of Economic Research, Inc.
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Other versions:
Maurice Obstfeld & Alan M. Taylor, 2003.
"Globalization and Capital Markets,"
NBER Chapters,
in: Globalization in Historical Perspective, pages 121-188
National Bureau of Economic Research, Inc.
[Downloadable!]
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