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Distance, Trade and FDI: A Hausman-Taylor SUR Approach

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  • Peter Egger

    (WIFO)

  • Michael Pfaffermayr

Abstract

This paper analyses the effects of distance as a common determinant of exports and FDI in a three-factor New Trade Theory model, assuming that distance affects both pure trade costs and plant set-up costs. Exports and FDI are not necessarily substitutes with respect to distance, since the predicted impact depends on its importance for fixed plant set-up costs relative to transportation costs and on the relative importance of vertical MNEs. For the empirical specification, we suggest that the impact of time-invariant variables such as distance is most appropriately analysed in a Hausman-Taylor SUR model. We apply our model to industry-level data of bilateral outward FDI stocks and exports of the US and Germany. Copyright © 2004 John Wiley & Sons, Ltd.
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  • Peter Egger & Michael Pfaffermayr, 2001. "Distance, Trade and FDI: A Hausman-Taylor SUR Approach," WIFO Working Papers 164, WIFO.
    • Handle: RePEc:wfo:wpaper:y:2001:i:164
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