Migration, FDI and the Margins of Trade

This paper investigates the relationships between trade, migration and FDI in an unied framework. Recent literature emphasizes the potential for migration to favor trade and FDI through a reduction in international transaction costs. The relationships between trade and migration on the one hand and trade and FDI on the other hand have been studied separately using standard gravity equations. In this paper, we acknowledge the interdependence between these two modes of foreign market access and present a model that characterizes rms' proximity concentration tradeo as a function of migration networks. At a theoretical level, we decompose the eect of migration into its impact on the variable trade costs, the xed cost to penetrate the foreign market, and the costs to set up a subsidiary abroad and derive the conditions under which migration induces an increase in the FDI-sales to trade ratio. At an empirical level, our identication strategy aims at controlling for a number of biases that arise from the interdependency between FDI and trade as well as for the well-known biases potentially arising from the omission of the extensive margin. Our results show that migration networks increase the FDI to trade ratio and that most of the eect comes from the intensive margin. The results are shown to be consistent with an interpretation in terms of information channel and to hold at the sectoral level.