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Distance, trade and FDI: a Hausman-Taylor SUR approach

  • Peter Egger

    (Department of Economics, University of Innsbruck, Austria)

  • Michael Pfaffermayr

    (Department of Economics, University of Innsbruck, Austria)

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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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 19 (2004)
Issue (Month): 2 ()
Pages: 227-246

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Handle: RePEc:jae:japmet:v:19:y:2004:i:2:p:227-246
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