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

Abstract

Trade-FDI Linkages in a System of Gravity Equations for German Regional DataAbstract 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.JEL Classification: C33, F14, F21

Does Causal Relationships Exist between External Trade and Foreign Direct Investment Flow to Agriculture in Ghana?

“…The practice of importing into a country and later follow up to set up production facilities may be attributable to this outcome. The results conform to the findings of a long-run relationship between FDI and imports (Mitze et al, 2009). The positive sign of the coefficients also connote complementarity of FDI and external trade, which is consistent with the conclusions of Kueh et al (2007).…”

“…Kueh et al (2007) showed that import tends to substitute FDI in short run for ASEAN-5 nations. Mitze et al (2009) examining cross-variable linkages found substitutive links between trade flows and outward FDI in line with earlier empirical evidence for Germany. Decomposing the data into West and East Germany, and using EU27 trade and FDI as an example, they identified that 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, export replacement effects of FDI were observed.…”

“…For ASEAN-5 nations, FDI and import complemented each other in the long run (Kueh et al, 2007). For the West German-EU15 sub-sample, Mitze et al (2009) observed that complementarities among export and outward FDI activity existed. Tadesse & Ryan (2002) using the counts and values of Japanese aggregate FDI and trade flows into more than 100 geographically and developmentally diverse countries, showed that Japanese FDI in the 1990s was generally trade creating.…”

“…Decomposing the data into West and East Germany, and using EU27 trade and FDI as an example, they identified that 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, export replacement effects of FDI were observed. Mitze et al (2009) however, showed that at the same time, outward FDI stimulated trade via reverse good imports. Brainard (1993) in his study, introduced transportation costs and economies of scale at the plant level into his model.…”

Influence of the performance of black economic empowerment shares on the Johannesburg stock exchange top 40

“…Thus, when using the fixed effects model with pooled data such as the panel data for this study, a spurious regression is prevented. Mitze, Alecke and Untiedt (2009) state that the FEM model's standard estimator has good properties when it is empirically examined for long-run regressions. The fixed effects model is used to determine the relationship between firm value, profitability and BEE shareholding.…”