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Gravity for FDI

  • Jörn Kleinert
  • Farid Toubal

Gravity equations explaining foreign affiliates' sales are ad hoc and hence estimated coefficients are hard to interpret. We therefore provide the theoretical underpinnings of the gravity equation applied to the analysis of sales of foreign affiliates of multinational firms. We argue that the success of the gravity equation results from the fact that it can be derived from various theoretical models. We illustrate this point by deriving a gravity equation from three different models of multinational firms. Using data on real affiliate sales, we show how the gravity equation can nevertheless be used to discriminate between the different theoretical models. Copyright � 2010 Blackwell Publishing Ltd.

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Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 18 (2010)
Issue (Month): 1 (02)
Pages: 1-13

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Handle: RePEc:bla:reviec:v:18:y:2010:i:1:p:1-13
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  1. Peter Egger & Michael Pfaffermayr, 2001. "Distance, Trade and FDI: A Hausman-Taylor SUR Approach," WIFO Working Papers 164, WIFO.
  2. Gordon H. Hanson & Raymond J. Mataloni & Matthew J. Slaughter, 2003. "Vertical Production Networks in Multinational Firms," NBER Working Papers 9723, National Bureau of Economic Research, Inc.
  3. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2006. "Trading Partners and Trading Volumes," DEGIT Conference Papers c011_022, DEGIT, Dynamics, Economic Growth, and International Trade.
  4. Venables, Anthony J., 1999. "Fragmentation and multinational production," European Economic Review, Elsevier, vol. 43(4-6), pages 935-945, April.
  5. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Scholarly Articles 3445092, Harvard University Department of Economics.
  6. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
  7. Joao Santos Silva & Silvana Tenreyro, 2005. "The log of gravity," LSE Research Online Documents on Economics 3744, London School of Economics and Political Science, LSE Library.
  8. Stephen Redding & Anthony J. Venables, 2003. "Geography and Export Performance: External Market Access and Internal Supply Capacity," NBER Working Papers 9637, National Bureau of Economic Research, Inc.
  9. Henrik Braconier & Pehr-Johan Norback & Dieter Urban, 2002. "Vertical FDI Reviseted," Development Working Papers 167, Centro Studi Luca d\'Agliano, University of Milano.
  10. Henrik Braconier & Pehr-Johan Norbäck & Dieter Urban, 2005. "Reconciling the Evidence on the Knowledge-capital Model," Review of International Economics, Wiley Blackwell, vol. 13(4), pages 770-786, 09.
  11. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  12. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  13. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, vol. 87(4), pages 520-44, September.
  14. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
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