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Distance, trade and FDI: a Hausman–Taylor SUR approach
Author(s) -
Egger Peter,
Pfaffermayr Michael
Publication year - 2004
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.721
Subject(s) - economics , foreign direct investment , new trade theory , econometrics , fixed cost , international economics , gravity equation , international trade , bilateral trade , trade barrier , microeconomics , macroeconomics , geography , archaeology , china
Abstract This paper analyses the effects of distance as a common determinant of exports and FDI in a three‐factor New Trade Theory model, assuming that distance affects both pure trade costs and plant set‐up costs. Exports and FDI are not necessarily substitutes with respect to distance, since the predicted impact depends on its importance for fixed plant set‐up costs relative to transportation costs and on the relative importance of vertical MNEs. For the empirical specification, we suggest that the impact of time‐invariant variables such as distance is most appropriately analysed in a Hausman–Taylor SUR model. We apply our model to industry‐level data of bilateral outward FDI stocks and exports of the US and Germany. Copyright © 2004 John Wiley & Sons, Ltd.