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Estimating the Impact of Time-Invariant Variables on FDI with Fixed Effects

  • Ronald B. Davies

    ()

  • Delia Ionascu
  • Helga Kristjánsdóttir

This paper applies the panel fixed effects with vector decomposition estimator to three FDI datasets to estimate the impact of time-invariant variables on FDI while including fixed effects. We find that the omission of fixed effects significantly biases several of these variables, especially those proxying for trade costs and culture. After including fixed effects, we find that many time-invariant variables indicate the importance of vertical FDI. We also find that by eliminating these biases, the differences across datasets largely disappear. Thus, controversies in the literature that are driven by differences in data sets may be resolved by using this estimation technique.

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File URL: http://hdl.handle.net/10.1007/s10290-008-0153-0
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Article provided by Springer in its journal Review of World Economics.

Volume (Year): 144 (2008)
Issue (Month): 3 (October)
Pages: 381-407

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Handle: RePEc:spr:weltar:v:144:y:2008:i:3:p:381-407
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  1. Ekholm, Karolina & Forslid, Rikard & Markusen, James R., 2003. "Export-Platform Foreign Direct Investment," CEPR Discussion Papers 3823, C.E.P.R. Discussion Papers.
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  9. Badi H. Baltagi & Peter Egger & Michael Pfaffermayr, 2005. "Estimating Models of Complex FDI: Are There Third-Country Effects?," Center for Policy Research Working Papers 73, Center for Policy Research, Maxwell School, Syracuse University.
  10. Bruce A. Blonigen & Ronald B. Davies & Glen R. Waddell & Helen T. Naughton, 2004. "FDI in Space: Spatial Autoregressive Relationships in Foreign Direct Investment," NBER Working Papers 10939, National Bureau of Economic Research, Inc.
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