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

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  • Davies, Ronald B.

    (Department of Economics, Copenhagen Business School)

  • Ionascu, Delia

    (Department of Economics, Copenhagen Business School)

  • Kristjánsdóttir, Helga

    (Department of Economics, Copenhagen Business School)

Abstract

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. JEL Classification: F14, F23 Key Words: Foreign Direct Investment, Trade Costs, Culture

Suggested Citation

  • Davies, Ronald B. & Ionascu, Delia & Kristjánsdóttir, Helga, 2007. "Estimating the Impact of Time-Invariant Variables on FDI with Fixed Effects," Working Papers 02-2007, Copenhagen Business School, Department of Economics.
  • Handle: RePEc:hhs:cbsnow:2007_002
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    3. Yuko Hashimoto & K. M. Wacker, 2016. "The role of information for international capital flows: new evidence from the SDDS," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 152(3), pages 529-557, August.
    4. Hellmanzik, Christiane & Schmitz, Martin, 2015. "Virtual proximity and audiovisual services trade," European Economic Review, Elsevier, vol. 77(C), pages 82-101.
    5. Hellmanzik, Christiane & Schmitz, Martin, 2017. "Taking gravity online: The role of virtual proximity in international finance," Journal of International Money and Finance, Elsevier, vol. 77(C), pages 164-179.
    6. Harms, Philipp & Shuvalova, Daria, 2020. "Cultural distance and international trade in services: A disaggregate view," Economic Systems, Elsevier, vol. 44(2).
    7. Adeel-Farooq, Rana Muhammad & Riaz, Muhammad Faraz & Ali, Tariq, 2021. "Improving the environment begins at home: Revisiting the links between FDI and environment," Energy, Elsevier, vol. 215(PB).
    8. James R. Markusen, 2021. "Putting per-capita income back into trade theory," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 10, pages 187-197, World Scientific Publishing Co. Pte. Ltd..
    9. Wacker, Konstantin M., 2013. "On the measurement of foreign direct investment and its relationship to activities of multinational corporations," Working Paper Series 1614, European Central Bank.
    10. Thomas O'Connor & Thomas Flavin, 2013. "The Effects of Ownership Structure on Corporate Financing Decisions: Evidence from Stock Market Liberalization," International Review of Finance, International Review of Finance Ltd., vol. 13(3), pages 383-405, September.
    11. Thomas O'Connor, 2012. "Investability, Corporate Governance and Firm Value," Economics Department Working Paper Series n223-12.pdf, Department of Economics, National University of Ireland - Maynooth.
    12. Helga Kristjansdottir & Fjola Bjork Karlsdottir, 2020. "Uk Foreign Direct Investment In The Oecd, Culture And Geography," Baltic Journal of Economic Studies, Publishing house "Baltija Publishing", vol. 6(5).
    13. Imre Ferto & Attila Jambor, 2015. "Drivers of vertical intra-industry trade: the case of the Hungarian agri-food sector," Agricultural Economics, International Association of Agricultural Economists, vol. 46(1), pages 113-123, January.
    14. Thomas O'Connor, 2014. "Legal bonding, investor recognition, and cross-listing premia in emerging markets," International Journal of Accounting and Finance, Inderscience Enterprises Ltd, vol. 4(3), pages 209-239.
    15. Jungmittag, Andre, 2014. "Der Trade-off zwischen deutschen Direktinvestitionen und Exporten: Wie wichtig sind die verschiedenen Dimensionen der Distanz?," Working Paper Series 04, Frankfurt University of Applied Sciences, Faculty of Business and Law.
    16. Bojnec, Štefan & Ferto, Imre, 2014. "Outward Foreign Direct Iinvestments and Merchandise Exports: The European OECD Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 87-99, June.

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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