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Gravity, Counterparties, and Foreign Investment

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  • Badarinza, Cristian
  • Ramadorai, Tarun
  • Shimizu, Chihiro

Abstract

Gravity models excel at explaining international trade and investment flows; their success poses a continuing puzzle. In a comprehensive dataset of global commercial real-estate investments, we find that the role of distance in the gravity model is well-explained by preferential matching between counterparties of the same nationality. This tendency for same-country matching is widespread, robust, and increases in poorly-governed locations. We structurally estimate an equilibrium matching model with a friction affecting different-nationality transactions. The model explains the persistent success of gravity using a combination of this friction and the spatial distribution of same-nationality counterparties, which is well-predicted by current and historical linguistic, cultural, and trade links between countries.

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  • Badarinza, Cristian & Ramadorai, Tarun & Shimizu, Chihiro, 2019. "Gravity, Counterparties, and Foreign Investment," CEPR Discussion Papers 13491, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13491
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    Cited by:

    1. Mr. Damien Puy & Ms. Yu Shi & Mr. Anil Ari, 2020. "Foreign Demand and Local House Prices: Evidence from the US," IMF Working Papers 2020/043, International Monetary Fund.
    2. Bailey, Michael & Gupta, Abhinav & Hillenbrand, Sebastian & Kuchler, Theresa & Richmond, Robert & Stroebel, Johannes, 2021. "International trade and social connectedness," Journal of International Economics, Elsevier, vol. 129(C).

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    More about this item

    Keywords

    Commercial real estate; Cross-border flows; Foreign investment; Gravity; Matching; Trust;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F30 - International Economics - - International Finance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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