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Gravity for FDI
Author(s) -
Kleinert Jörn,
Toubal Farid
Publication year - 2010
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2009.00869.x
Subject(s) - multinational corporation , gravity equation , gravity model of trade , foreign direct investment , econometrics , economics , point (geometry) , structural equation modeling , mathematics , international trade , macroeconomics , statistics , bilateral trade , political science , geometry , finance , china , law
Gravity equations explaining foreign affiliates' sales are ad hoc and hence estimated coefficients are hard to interpret. We therefore provide the theoretical underpinnings of the gravity equation applied to the analysis of sales of foreign affiliates of multinational firms. We argue that the success of the gravity equation results from the fact that it can be derived from various theoretical models. We illustrate this point by deriving a gravity equation from three different models of multinational firms. Using data on real affiliate sales, we show how the gravity equation can nevertheless be used to discriminate between the different theoretical models.