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Trade-FDI Linkages in a System of Gravity Equations for German Regional Data

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  • Mitze, Timo
  • Alecke, Björn
  • Untiedt, Gerhard

Abstract

We analyse the nature of German trade-FDI linkages within the EU27 based on a simultaneous equation gravity approach for imports, exports, in- and outward FDI stocks. We adopt both a Hausman-Taylor (1981) IV approach (3SLS-GMM) and rival non-IV estimation (the system extension to the Fixed Effects Vector Decomposition model recently proposed by Plümper & Tröger, 2007). Turning to the results, both estimators give empirical support for our chosen gravity setup as an appropriate framework in explaining German trade and FDI activity. Looking carefully at cross-variable linkages we basically find substitutive links between trade flows and outward FDI in line with earlier empirical evidence for Germany. Building upon German state level data we are also able to analyse the sensitivity of the results for regional sub-samples. The latter disaggregation hints at structural differences among the trade and FDI activity of the two West and East German macro regions on the one hand, and also their interaction with the 'core' EU15 member states opposed to the overall EU27 aggregate on the other hand. Taking West German-EU27 trade & FDI as an example, the identified pairwise linkages closely follow the theoretical predictions of New Trade Theory models as in Baldwin & Ottaviano (2001): That is, when trade is merely of intra-industry type with non-zero trade costs, we observe export replacement effects of FDI. However, at the same time outward FDI stimulates trade via reverse good imports. For the West German-EU15 sub-sample we even reveal complementaries among export and outward FDI activity. This strongly advocates to care for the regional dimension in analysing cross-variable linkages of trade and FDI.

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  • Mitze, Timo & Alecke, Björn & Untiedt, Gerhard, 2009. "Trade-FDI Linkages in a System of Gravity Equations for German Regional Data," Ruhr Economic Papers 84, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:84
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    1. Mitze, Timo, 2010. "Estimating Gravity Models of International Trade with Correlated Time-Fixed Regressors: To IV or not IV?," MPRA Paper 23540, University Library of Munich, Germany.

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    More about this item

    Keywords

    Trade; FDI; panel data; simultaneous equations;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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