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

  • Ronald B. Davies

    ()

    (University of Oregon Economics Department)

  • Delia Ionascu

    ()

    (Copenhagen Business School)

  • Helga Kristjánsdóttir

    ()

    (University of Iceland)

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 University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2007-8.

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Length: 37
Date of creation: 01 Mar 2007
Date of revision: 01 May 2007
Handle: RePEc:ore:uoecwp:2007-8
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  1. Bruce A. Blonigen & Ronald B. Davies, 2004. "The Effects of Bilateral Tax Treaties on U.S. FDI Activity," International Tax and Public Finance, Springer, vol. 11(5), pages 601-622, 09.
  2. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, June.
  3. Barro, Robert J & Lee, Jong-Wha, 2001. "International Data on Educational Attainment: Updates and Implications," Oxford Economic Papers, Oxford University Press, vol. 53(3), pages 541-63, July.
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  7. Blonigen, Bruce A. & Davies, Ronald B. & Waddell, Glen R. & Naughton, Helen T., 2007. "FDI in space: Spatial autoregressive relationships in foreign direct investment," European Economic Review, Elsevier, vol. 51(5), pages 1303-1325, July.
  8. Ronald B. Davies, 2008. "Hunting High and Low for Vertical FDI," Review of International Economics, Wiley Blackwell, vol. 16(2), pages 250-267, 05.
  9. 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.
  10. David L. Carr & James R. Markusen & Keith E. Maskus, 2003. "Estimating the Knowledge-Capital Model of the Multinational Enterprise: Reply," American Economic Review, American Economic Association, vol. 93(3), pages 995-1001, June.
  11. 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.
  12. Ekholm, Karolina & Forslid, Rikard & Markusen, James R., 2003. "Export-Platform Foreign Direct Investment," CEPR Discussion Papers 3823, C.E.P.R. Discussion Papers.
  13. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  14. Bruce A. Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," NBER Working Papers 11299, National Bureau of Economic Research, Inc.
  15. 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.
  16. Robert E. Lipsey, 2006. "Measuring the Impacts of FDI in Central and Eastern Europe," NBER Working Papers 12808, National Bureau of Economic Research, Inc.
  17. 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.
  18. 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.
  19. Janeba, Eckhard, 2007. "International trade and consumption network externalities," European Economic Review, Elsevier, vol. 51(4), pages 781-803, May.
  20. Jonathan Eaton & Akiko Tamura, 1995. "Bilateralism and Regionalism in Japanese and U.S. Trade and Direct Foreign Investment Patterns," NBER Working Papers 4758, National Bureau of Economic Research, Inc.
  21. 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.
  22. David L. Carr & James R. Markusen & Keith E. Maskus, 1998. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," NBER Working Papers 6773, National Bureau of Economic Research, Inc.
  23. 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.
  24. Yeaple, Stephen Ross, 2003. "The complex integration strategies of multinationals and cross country dependencies in the structure of foreign direct investment," Journal of International Economics, Elsevier, vol. 60(2), pages 293-314, August.
  25. Bergstrand, Jeffrey H. & Egger, Peter, 2007. "A knowledge-and-physical-capital model of international trade flows, foreign direct investment, and multinational enterprises," Journal of International Economics, Elsevier, vol. 73(2), pages 278-308, November.
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