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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. 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.
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  3. Ronald B. Davies, 2008. "Hunting High and Low for Vertical FDI," Review of International Economics, Wiley Blackwell, vol. 16(2), pages 250-267, 05.
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  7. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-71, June.
  8. Robert J. Barro & Jong-Wha Lee, 2000. "International Data on Educational Attainment Updates and Implications," NBER Working Papers 7911, National Bureau of Economic Research, Inc.
  9. Mutti, John & Grubert, Harry, 2004. "Empirical asymmetries in foreign direct investment and taxation," Journal of International Economics, Elsevier, vol. 62(2), pages 337-358, March.
  10. Janeba, Eckhard, 2007. "International trade and consumption network externalities," European Economic Review, Elsevier, vol. 51(4), pages 781-803, May.
  11. 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.
  12. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
  13. 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.
  14. 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.
  15. 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.
  16. Eaton Jonathan & Tamura Akiko, 1994. "Bilateralism and Regionalism in Japanese and U.S. Trade and Direct Foreign Investment Patterns," Journal of the Japanese and International Economies, Elsevier, vol. 8(4), pages 478-510, December.
  17. Bruce A. Blonigen & Ronald B. Davies, 2000. "The Effects of Bilateral Tax Treaties on U.S. FDI Activity," NBER Working Papers 7929, National Bureau of Economic Research, Inc.
  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. 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.
  20. Head, Keith & Ries, John, 2005. "Judging Japan's FDI: The verdict from a dartboard model," Journal of the Japanese and International Economies, Elsevier, vol. 19(2), pages 215-232, June.
  21. 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.
  22. Ekholm, Karolina & Forslid, Rikard & Markusen, James R., 2003. "Export-Platform Foreign Direct Investment," CEPR Discussion Papers 3823, C.E.P.R. Discussion Papers.
  23. 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.
  24. Bruce A. Blonigen & Ronald B. Davies & Glen R. Waddell & Helen T. Naughton, 2004. "FDI in Space: Spatial Autoregressive Relationships in Foreign Direct Investment," NBER Working Papers 10939, National Bureau of Economic Research, Inc.
  25. Robert E. Lipsey, 2006. "Measuring the Impacts of FDI in Central and Eastern Europe," NBER Working Papers 12808, National Bureau of Economic Research, Inc.
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