Estimating Models of Complex FDI: Are There Third-Country Effects?

Abstract

The recent general equilibrium theory of trade and multinationals emphasizes the importance of third countries and the complex integration strategies of multinationals. Little has been done to test this theory empirically. This paper attempts to rectify this situation by considering not only bilateral determinants, but also spatially weighted third-country determinants of foreign direct investment (FDI). Since the dependency among host markets is particularly related to multinationals' trade between them, we use trade costs (distances) as spatial weights. Using panel data on U.S. industries and host countries observed over the 1989-1999 period, we estimate a "complex FDI" version of the knowledge-capital model of U.S. outward FDI by various recently developed spatial panel data generalized moments (GM) estimators. We find that third-country effects are significant, lending support to the existence of various modes of complex FDI.

A generalized spatial error components model for gravity equations

“…Accordingly, cross-sectional gravity models are typically based on unbalanced two-way panels. Using the notation in Pfaffermayr (2009), for unbalanced panel data it is useful to introduce a so-called selector matrix S o that is obtained from the identity matrix I C 2 by skipping all rows that refer to unobserved, missing values (see also Baltagi et al 2007). For this approach to be valid, the missingat-random assumption has to hold.…”

“…Under this assumption, whether data are missing or not only depend on the set of explanatory variables and the observed values of outcome, but not on the missing ones. An important consequence of this assumption is that the missing data mechanism is ignorable and that maximum likelihood estimation can then be based on the marginal distribution of the observed model (see Baltagi et al 2007;Pfaffermayr 2009). …”

“…The present paper mainly builds on and extends three strands of earlier work: (i) the one on the iterative structural estimation of gravity models as in Anderson and Wincoop (2003) or Bergstrand et al (2013); (ii) the one on the estimation of spatial error component models with component-specific spatial processes as in Baltagi et al 2013;and (iii) the one on the estimation of unbalanced spatial error components models as in Baltagi et al 2007 andPfaffermayr (2009). The remainder of the paper is organized as follows: Section 2 presents the general econometric model structure.…”

Does domestic financial development enhance the linkages between foreign direct investment and economic growth?

“…Also, Blomstrom et al (1992) find that the initial level of development helps determine the absorptive capacity of a recipient, and Balasubramanyam et al (1996) and Borensztein et al (1998) argue that trade policy and human capital development significantly enhance the connection between FDI and economic development, respectively. Indeed, Baltagi et al (2007 find that the role of FDI is significantly influenced by the third countries effects and the complex integration strategies of multinationals, especially the bilateral trade costs among host countries. Baltagi et al (2007, p 273), for example, argue that "… These policies [investment liberalization, training programs, and other FDI-attracting policies] can only be effective if a country is not too remote from large foreign consumer bases."…”

The pattern of EU FDI in the manufacturing industry: What role do third country effects and trade policies play?

“…While variables measuring bilateral trade policies are generally included in the models, third country trade policies have been not explicitly considered to date. A number of papers have recently estimated the so-called "third country effects" (e.g., Blonigen et al 2007;Baltagi et al 2007Baltagi et al , 2008Chou et al 2011), that is, the impact that neighbouring third countries FDI and characteristics may exert on the FDI in a host country and found that these factors may contribute to explain more complex types of FDI. These papers, however, do not include an explicit variable for third countries trade policies.…”