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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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Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp228.

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Date of creation: 20 Aug 2007
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Handle: RePEc:iis:dispap:iiisdp228
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  8. Daniel Gbetnkom, 2006. "On the Empirics of Market Integration in ECOWAS," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 9(4), pages 289-303.
  9. Coughlin, Cletus C & Terza, Joseph V & Arromdee, Vachira, 1991. "State Characteristics and the Location of Foreign Direct Investment within the United States," The Review of Economics and Statistics, MIT Press, vol. 73(4), pages 675-83, November.
  10. Keith Head & John Ries, 2004. "Judging Japan's FDI: The verdict from a dartboard model," Hi-Stat Discussion Paper Series d04-58, Institute of Economic Research, Hitotsubashi University.
  11. Robert E. Lipsey, 2006. "Measuring the Impacts of FDI in Central and Eastern Europe," NBER Working Papers 12808, National Bureau of Economic Research, Inc.
  12. Markusen, James R & Maskus, Keith E, 2002. "Discriminating among Alternative Theories of the Multinational Enterprise," Review of International Economics, Wiley Blackwell, vol. 10(4), pages 694-707, November.
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  15. Ting Gao, 2005. "Foreign Direct Investment In China: How Big Are The Roles Of Culture And Geography?," Pacific Economic Review, Wiley Blackwell, vol. 10(2), pages 153-166, 06.
  16. Bruce A. Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," NBER Working Papers 11299, National Bureau of Economic Research, Inc.
  17. Sarah Y. Tong, 2005. "Ethnic Networks in FDI and the Impact of Institutional Development," Review of Development Economics, Wiley Blackwell, vol. 9(4), pages 563-580, November.
  18. David L. Carr & James R. Markusen & Keith E. Maskus, 2001. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," American Economic Review, American Economic Association, vol. 91(3), pages 693-708, June.
  19. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2007. "Estimating models of complex FDI: Are there third-country effects?," Journal of Econometrics, Elsevier, vol. 140(1), pages 260-281, September.
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