作业帮关于fdi的英语文章有吗?
来源：学生作业帮 编辑：作业帮 分类：英语作业 时间：2024/11/08 11:40:28
关于fdi的英语文章有吗?
不知你要的是不是这种：
The Predictive Capacity of the Gravity Model of Trade on Foreign Direct Investment
Index
1 Introduction……………………………………………………………………………3
2 Theoretical background …………………………………………………………….5
2.1 Reasoning behind FDI………………………………………………………5
2.2 The Gravity Model ………………………………………………………….8
3 Empirical approach……………………………………………………………….10
4 Basic Model Specifications…………………………………………………………...12
4.1 The OLS model……………………………………………………….12
4.2 OLS estimations……….……………………………………………………14
5 The Fixed-effect Model……………………………………………………………….19
5.1 Fixed-effect model specification……..……………………………………..19
5.2 Fixed-effect estimations……….……………………………………………21
6 Conclusions……………………………………………………………………………25
Appendices………………………………………………………………………………27
1 Introduction
The link between foreign direct investments (FDI) and trade is firmly established in economic literature. Casson (1990) has for example suggested that FDI is a “logical intersection” of the theory of international capital markets, the theory of the firm and trade theory. Singh & Jun (1995) and Tanaka (2006) mention that firms might conduct FDI for the specific purpose of “tariff hopping” and avoiding trade costs, suggesting that trade issues have significant sway when firms make investment decisions. Yet despite the vast amount of literature on this subject, very few have tried to look at FDI through the lens of trade theory, choosing rather to approach the subject on either a macroeconomic-level or on firm-level. The purpose and scope of this paper is not to extend and build upon the ideas from such studies, but rather to explore FDI through the lens of trade-theory.
The gravity model has been widely used in trade-theory to predict the level of trade between different countries based on their economic size and distance from each other, and it has been recognized for its empirical success and consistently high statistical explanatory power (Bergstrand 1985). However, the vast majority of FDI studies have chosen to incorporate trade theory and certain components of the gravity model of trade into the macroeconomic-level of study. It is the intention of this study to refrain from doing so, but rather to use the gravity model exclusively in modeling FDI values. Questions that will be asked are whether the gravity model of trade can serve as a reliable model for FDI value as well? Are there certain variables in the gravity model that are distinctively powerful determinants of FDI? The idea is of course to see how strong the link between FDI and trade actually is; whether the gravity model can obtain as consistently strong results for FDI as it does for trade.
For practical purposes, FDI in this paper will be defined as when an investor from one country obtains controlling interest in a (new or existing) firm in another country, and then operates that firm as a part of the multinational business of the investor. FDI may be financed through parent company transfer of funds to the new affiliate, borrowing from
3
home-country lenders, borrowing in the host country by the parent company, or any combination of these strategies. A foreign investor is considered to have control over a firm if they have 10% of shares or voting power in an enterprise (or the equivalent in an unincorporated firm). FDI also pertains to investments in infrastructure, equipment and/or organizations that allow the foreign investor to influence the management of the firm.
The data for FDI values come from the OECD.stat statistical database and the data used in this paper span from the years 1990 to 2005. This time-period was chosen specifically due to the post-Cold War market and trade liberalization initiatives that were prevalent.1 Countries included in the study are OECD countries chosen for geographic dispersion and relevancy (Australia, Belgium, Canada, Czech Republic, France, Germany, Italy, Japan, Korean Republic, Mexico, Netherlands, Spain, Sweden, Switzerland, United Kingdom and United States), and five major transitioning countries (Brazil, China, India, Russia and South Africa). One issue that Ceglowski (2006) mentions in her study, which also applies to this study, is that the OECD data were supplied by national statistical offices. Consequently, the investment partner detail in the data varies by country. For some country pairs, only a single source of foreign direct investment is available. In such instances, these are the data used in the analysis. In other cases, both partners report incoming and outgoing direct investments. These two reported values are usually not identical, and the size of the difference varies considerably. The discrepancies reflect the methods, scope, and quality of the data collection used by the national statistical offices that supplied the data. In these cases, the values from the country with the most thorough and consistent reporting was used.
Since the FDI data is only available as calculated using current US dollars, the GDP and GDP per-capita data are also in current US dollars. The GDP data however is taken from the World Bank World Development Index due to an easier format to use and the availability and accuracy of the data. One concern with using current US dollars is of course the fluctuations of the exchange rates, and whether converted current values can accurately capture the effect these fluctuations had on investments in the past. The problems associated with fluctuating exchange rates should of course be taken into consideration when making economic inferences and drawing conclusions from the models.
The next section serves as a theoretical background and review for FDI theory and the Gravity Model of Trade, as well as their applications in this particular study. It is followed by an overview of the empirical approach of this study. A specification as well as analysis of the two models used in this study (OLS and fixed-effect) follows, and a summary concludes.
2 Theoretical background
Traditionally studies on FDI have approached the problem either on an economic-level or on firm-level. Firm-level approach to FDI is influenced by conventional investment theory and microeconomics, whereas the economic-level approach is based on international macroeconomics. This study will seek to use the firm-level approach to map out the theoretical groundwork of the paper, and then use the economic-level approach to empirically test the hypotheses proposed. As will become evident, this study mostly concerns the so-called horizontal direct investment theory due to both data-constraint as well as the nature of the study.
2.1 Theories on the reasoning behind FDI decisions
A central hypothesis of this paper will be the complementary relationship between FDI and trade. One way to explain the FDI decision process and how it relates to trade is through Helpman, Melitz & Yeaple’s (2004) theory of proximity-concentration trade-offs.2 In this theory, firms engage in foreign markets because markets are imperfect, and in weighing cost-benefits firms can decide to either; a) pull out of the foreign market, b)
2 For a detailed walkthrough of the theoretical model, refer to Appendix II.
5
export to the foreign market exclusively, or c) invest in a foreign production facility to serve that specific market (FDI). The decision of interest to my study is whether a firm exports or invests in a foreign market. According to Helpman, Melitz & Yeaple (2004) it is the different relative costs of the modes of access that determine whether a firm engages in exports only or whether they decide to do FDI. Exporting involves lower fixed costs whereas investing means lower variable costs. The choice by the firm in this case is driven by “the proximity-concentration trade-off: relative to exports, FDI saves transport costs, but duplicates production facilities and therefore requires higher fixed costs. In equilibrium, no firm engages in both activities for the same foreign market.” Essentially, Helpman, Melitz & Yeaple find that exports are more profitable than FDI for low-productivity firms and less profitable for high-productivity firms.
The detail of importance to this paper is that all firms identify potential profits in a foreign market; the only difference is that their mode of access varies depending on productivity. One firm investing a production plant in a foreign market does not preclude another firm from exporting a comparable product to that same market. In fact, a market that is identified to be profitable by one firm is highly likely to receive the same assessment by a competing firm. Hence it is highly possible that trade and FDI are complementary unless there is considerable information asymmetry or barriers to entry. It is this connection between FDI and exports/trade that is the theoretical basis for the empirical models of this study.
Worth noting about the proximity-concentration trade-off theory is that it is only applicable to horizontal investments3; which fits in well with my study. As Markusen, Venables, Konan and Zhang (1996) note in their paper, horizontal direct investment is more relevant to developed countries, whereas vertical direct investment is more relevant to investment in developing countries. In their study they find that “horizontal multinationals dominate when the countries are similar in both size and in relative endowments, and when trade costs are moderate to high”. Since a considerable majority of the countries in my sample are developed countries, horizontal investments will be of greater concern. However, a number of countries are transitioning economies (China, India, Brazil etc.), in which case a blend of horizontal and vertical FDI might exist.
The issue of interest in horizontal investment is that these investments are high when trade-costs are moderate to high. If one were to apply the proximity-concentration trade-off theory, it would be obvious that the variable costs associated with exports are higher in these cases and firms that would’ve otherwise engaged in exports will either pull out of the market or simply invest (FDI). Another strand of theories worth noting is the Export-Platform FDI that Ekholm, Forslid and Markusen (2005) have developed. In their study they identify conditions under which large countries use small countries as an export platform to server other high income countries. The reasoning behind this type of horizontal investment is to avoid trade barriers as well as draw benefits from potential free trade agreements (FTAs). The implications of their theory will be discussed further in the empirical analysis section of this paper. The issue however is that this type of horizontal investment seems to contradict the gravity theory of my study. According to the export-platform theory firms inside the EU for example wouldn’t have to worry about trade barriers or other costs, therefore their need to invest in other EU countries should be very small. However, in this paper I would argue that investments between countries in close proximity is still greater than distant ones due to two factors: 1) since similar countries trade more with each other than dissimilar ones, then there should be more investments between neighboring countries or countries that are part of the same FTA due to less costs and risks; and 2) conventional FDI theory only deals with Multinationals, whereas I would argue that Small and Medium-sized Enterprises (SMEs) constitute a significant portion of FDI. One explanation for this theory would be that Multinational firms nowadays have become Global firms and their investment costs are minimal irrespective of region in the world. Investment costs for SMEs however, are still considerable, and therefore these investments tend to end up in closer countries both in geographic and cultural terms.
7
Vertical investments are only of peripheral interest in this study. As Zhang and Markusen (1997) explain in their study, vertical multinationals exploit factor-price differences in the world economy and allocate their investments and production accordingly, essentially relocating labor-intensive but low-skill production to low-wage countries. This type of investment might be of interest in data from countries such as China and India who have traditionally been recipients of such vertical investments. However, with these economies in transition and their accumulation of capital, a “reverse” vertical investment could potentially be of interest. This is to say that firms from these traditionally low-wage countries could potentially invest in more developed countries in order to quickly gain access to a high-skill labor-pool. If this is the case, then FDI in both directions would be of interest to observe, rather than just one direction as might be suggested in conventional vertical investment theory. This thought process might explain potential discrepancies between expected FDI based on distance and market size, and actual observations.
To summarize, the important theoretical components of this paper are that firms from one country identify similar foreign markets as being potentially profitable, and the means by which they serve these foreign markets is determined by the productivity of an individual firm. While there are several factors that affect whether a market is deemed profitable by firms, the central theory of this paper holds that distance (both physical and cultural) and market size are the two most prominent factors due to perceptions of risk and the involvement of all firms (and not just MNEs as is conventional in FDI theory) in FDI activity. Finally, growing markets are not only targets for investment, but have large firms capable of investing abroad themselves. This changing market outlook could potentially make international investment more reciprocal than before, and relationships that were previously identified as being “vertical” could potentially be “horizontal” in nature, which would make these new markets highly interesting for this study.
3 Empirical approach This study will use the macroeconomic approach to FDI as a framework for the empirical study. The reason for choosing a macroeconomic approach rather than the microeconomic firm-level approach is two-fold. Firstly, the gravity model of trade is a model that measures macroeconomic data and to use it in modeling microeconomic data would be problematic to say the least. Secondly, almost all empirical studies on FDI have been done using the macroeconomic approach due to availability of data and simplic
10
creating a feasible model. Essentially, the macroeconomic approach is more suited to observe how FDI flows in certain patterns, which is also the purpose of this paper. The idea behind the macroeconomic approach to FDI is that it emphasizes the determinants of why net investment among pairs or groups of nations tends to flow in certain patterns (Grosse, R. & Trevino, L.J. 1996). It attempts to explain FDI behavior with macroeconomic variables such as inflation, national income and exchange rate etc. (Trevino, L.J & Mixon Jr., F.G. 2004). As Grosse and Trevino (1996) demonstrate in their study of foreign FDI in the U.S, most macroeconomic studies on FDI focus on three separate groups of independent variables: 1) economic, such as GDP, per capita income, exchange rate, interest rates etc.; 2) political risk; and 3) distance in both absolute terms and cultural terms. Since this paper approaches FDI using the gravity model of trade, only those economic factors included in the gravity model such as GDP and the distance variable will be included explicitly. Political risk is an interesting variable since it not only pertains to societal and governmental affairs, but also includes operations costs as part of the overall risks involved in an investment. These operations costs can sometimes be attributed to cultural factors, which make political risk a highly interesting variable for this study. However, as Singh and Jun (1995) note in their paper, most empirical studies on political risk have not been statistically significant, rendering it a rather unreliable variable to
st
sweeping terms, well-off countries tend to have more stable institutions than poorer countries. Thus the most distinguishing variables used in this study will be home and host country GDP and GDP per-capita, as well as the distance between each country-pair. The reasoning behind including host country as well as home country GDP in the model is that host country market size is an indicator of potential returns on an investment and home countr
a
11
positively correlated with FDI, meaning the larger the market size the more FDI will be conducted. Per-capita income being included (aside from aforementioned proxy of risk) is built upon the concept that countries with similar markets tend to trade with each other more than dissimilar ones.7 As Helpman, Melitz & Yeaple (2004) mention in their proximity-concentration trade-off theory, higher productivity firms are more likely to engage in FDI activity and well-off countries are most likely to have higher productivity firms. Therefore it is reasonable to expect that home country per-capita GDP should have a positive effect on FDI. In addition Grosse and Trevino (1996) mention in their paper that demand patterns as well as firm behavior explain the trade between similar countries. This concept is especially interesting to this study since the data encompasses OECD member countries as well as the five co
sp
markets tend to be rather similar. Thus the per-capita income of the host country is also expected to have a positive impact on FDI. Distance is central to the gravity model of trade and I have included two variables in order to test its importance to FDI. Distance in this paper pertains to geographic distance and the language dummy serves as an indicator of cultural distance. The rationale behind including geographic distance to explain FDI is the greater cost of obtaining relevant information as well as the difficulties in managing affiliates in distant regions. Cultural distance may affect
common official language.
没弄完,字数受限,不知方向弄得对不对呢
The Predictive Capacity of the Gravity Model of Trade on Foreign Direct Investment
Index
1 Introduction……………………………………………………………………………3
2 Theoretical background …………………………………………………………….5
2.1 Reasoning behind FDI………………………………………………………5
2.2 The Gravity Model ………………………………………………………….8
3 Empirical approach……………………………………………………………….10
4 Basic Model Specifications…………………………………………………………...12
4.1 The OLS model……………………………………………………….12
4.2 OLS estimations……….……………………………………………………14
5 The Fixed-effect Model……………………………………………………………….19
5.1 Fixed-effect model specification……..……………………………………..19
5.2 Fixed-effect estimations……….……………………………………………21
6 Conclusions……………………………………………………………………………25
Appendices………………………………………………………………………………27
1 Introduction
The link between foreign direct investments (FDI) and trade is firmly established in economic literature. Casson (1990) has for example suggested that FDI is a “logical intersection” of the theory of international capital markets, the theory of the firm and trade theory. Singh & Jun (1995) and Tanaka (2006) mention that firms might conduct FDI for the specific purpose of “tariff hopping” and avoiding trade costs, suggesting that trade issues have significant sway when firms make investment decisions. Yet despite the vast amount of literature on this subject, very few have tried to look at FDI through the lens of trade theory, choosing rather to approach the subject on either a macroeconomic-level or on firm-level. The purpose and scope of this paper is not to extend and build upon the ideas from such studies, but rather to explore FDI through the lens of trade-theory.
The gravity model has been widely used in trade-theory to predict the level of trade between different countries based on their economic size and distance from each other, and it has been recognized for its empirical success and consistently high statistical explanatory power (Bergstrand 1985). However, the vast majority of FDI studies have chosen to incorporate trade theory and certain components of the gravity model of trade into the macroeconomic-level of study. It is the intention of this study to refrain from doing so, but rather to use the gravity model exclusively in modeling FDI values. Questions that will be asked are whether the gravity model of trade can serve as a reliable model for FDI value as well? Are there certain variables in the gravity model that are distinctively powerful determinants of FDI? The idea is of course to see how strong the link between FDI and trade actually is; whether the gravity model can obtain as consistently strong results for FDI as it does for trade.
For practical purposes, FDI in this paper will be defined as when an investor from one country obtains controlling interest in a (new or existing) firm in another country, and then operates that firm as a part of the multinational business of the investor. FDI may be financed through parent company transfer of funds to the new affiliate, borrowing from
3
home-country lenders, borrowing in the host country by the parent company, or any combination of these strategies. A foreign investor is considered to have control over a firm if they have 10% of shares or voting power in an enterprise (or the equivalent in an unincorporated firm). FDI also pertains to investments in infrastructure, equipment and/or organizations that allow the foreign investor to influence the management of the firm.
The data for FDI values come from the OECD.stat statistical database and the data used in this paper span from the years 1990 to 2005. This time-period was chosen specifically due to the post-Cold War market and trade liberalization initiatives that were prevalent.1 Countries included in the study are OECD countries chosen for geographic dispersion and relevancy (Australia, Belgium, Canada, Czech Republic, France, Germany, Italy, Japan, Korean Republic, Mexico, Netherlands, Spain, Sweden, Switzerland, United Kingdom and United States), and five major transitioning countries (Brazil, China, India, Russia and South Africa). One issue that Ceglowski (2006) mentions in her study, which also applies to this study, is that the OECD data were supplied by national statistical offices. Consequently, the investment partner detail in the data varies by country. For some country pairs, only a single source of foreign direct investment is available. In such instances, these are the data used in the analysis. In other cases, both partners report incoming and outgoing direct investments. These two reported values are usually not identical, and the size of the difference varies considerably. The discrepancies reflect the methods, scope, and quality of the data collection used by the national statistical offices that supplied the data. In these cases, the values from the country with the most thorough and consistent reporting was used.
Since the FDI data is only available as calculated using current US dollars, the GDP and GDP per-capita data are also in current US dollars. The GDP data however is taken from the World Bank World Development Index due to an easier format to use and the availability and accuracy of the data. One concern with using current US dollars is of course the fluctuations of the exchange rates, and whether converted current values can accurately capture the effect these fluctuations had on investments in the past. The problems associated with fluctuating exchange rates should of course be taken into consideration when making economic inferences and drawing conclusions from the models.
The next section serves as a theoretical background and review for FDI theory and the Gravity Model of Trade, as well as their applications in this particular study. It is followed by an overview of the empirical approach of this study. A specification as well as analysis of the two models used in this study (OLS and fixed-effect) follows, and a summary concludes.
2 Theoretical background
Traditionally studies on FDI have approached the problem either on an economic-level or on firm-level. Firm-level approach to FDI is influenced by conventional investment theory and microeconomics, whereas the economic-level approach is based on international macroeconomics. This study will seek to use the firm-level approach to map out the theoretical groundwork of the paper, and then use the economic-level approach to empirically test the hypotheses proposed. As will become evident, this study mostly concerns the so-called horizontal direct investment theory due to both data-constraint as well as the nature of the study.
2.1 Theories on the reasoning behind FDI decisions
A central hypothesis of this paper will be the complementary relationship between FDI and trade. One way to explain the FDI decision process and how it relates to trade is through Helpman, Melitz & Yeaple’s (2004) theory of proximity-concentration trade-offs.2 In this theory, firms engage in foreign markets because markets are imperfect, and in weighing cost-benefits firms can decide to either; a) pull out of the foreign market, b)
2 For a detailed walkthrough of the theoretical model, refer to Appendix II.
5
export to the foreign market exclusively, or c) invest in a foreign production facility to serve that specific market (FDI). The decision of interest to my study is whether a firm exports or invests in a foreign market. According to Helpman, Melitz & Yeaple (2004) it is the different relative costs of the modes of access that determine whether a firm engages in exports only or whether they decide to do FDI. Exporting involves lower fixed costs whereas investing means lower variable costs. The choice by the firm in this case is driven by “the proximity-concentration trade-off: relative to exports, FDI saves transport costs, but duplicates production facilities and therefore requires higher fixed costs. In equilibrium, no firm engages in both activities for the same foreign market.” Essentially, Helpman, Melitz & Yeaple find that exports are more profitable than FDI for low-productivity firms and less profitable for high-productivity firms.
The detail of importance to this paper is that all firms identify potential profits in a foreign market; the only difference is that their mode of access varies depending on productivity. One firm investing a production plant in a foreign market does not preclude another firm from exporting a comparable product to that same market. In fact, a market that is identified to be profitable by one firm is highly likely to receive the same assessment by a competing firm. Hence it is highly possible that trade and FDI are complementary unless there is considerable information asymmetry or barriers to entry. It is this connection between FDI and exports/trade that is the theoretical basis for the empirical models of this study.
Worth noting about the proximity-concentration trade-off theory is that it is only applicable to horizontal investments3; which fits in well with my study. As Markusen, Venables, Konan and Zhang (1996) note in their paper, horizontal direct investment is more relevant to developed countries, whereas vertical direct investment is more relevant to investment in developing countries. In their study they find that “horizontal multinationals dominate when the countries are similar in both size and in relative endowments, and when trade costs are moderate to high”. Since a considerable majority of the countries in my sample are developed countries, horizontal investments will be of greater concern. However, a number of countries are transitioning economies (China, India, Brazil etc.), in which case a blend of horizontal and vertical FDI might exist.
The issue of interest in horizontal investment is that these investments are high when trade-costs are moderate to high. If one were to apply the proximity-concentration trade-off theory, it would be obvious that the variable costs associated with exports are higher in these cases and firms that would’ve otherwise engaged in exports will either pull out of the market or simply invest (FDI). Another strand of theories worth noting is the Export-Platform FDI that Ekholm, Forslid and Markusen (2005) have developed. In their study they identify conditions under which large countries use small countries as an export platform to server other high income countries. The reasoning behind this type of horizontal investment is to avoid trade barriers as well as draw benefits from potential free trade agreements (FTAs). The implications of their theory will be discussed further in the empirical analysis section of this paper. The issue however is that this type of horizontal investment seems to contradict the gravity theory of my study. According to the export-platform theory firms inside the EU for example wouldn’t have to worry about trade barriers or other costs, therefore their need to invest in other EU countries should be very small. However, in this paper I would argue that investments between countries in close proximity is still greater than distant ones due to two factors: 1) since similar countries trade more with each other than dissimilar ones, then there should be more investments between neighboring countries or countries that are part of the same FTA due to less costs and risks; and 2) conventional FDI theory only deals with Multinationals, whereas I would argue that Small and Medium-sized Enterprises (SMEs) constitute a significant portion of FDI. One explanation for this theory would be that Multinational firms nowadays have become Global firms and their investment costs are minimal irrespective of region in the world. Investment costs for SMEs however, are still considerable, and therefore these investments tend to end up in closer countries both in geographic and cultural terms.
7
Vertical investments are only of peripheral interest in this study. As Zhang and Markusen (1997) explain in their study, vertical multinationals exploit factor-price differences in the world economy and allocate their investments and production accordingly, essentially relocating labor-intensive but low-skill production to low-wage countries. This type of investment might be of interest in data from countries such as China and India who have traditionally been recipients of such vertical investments. However, with these economies in transition and their accumulation of capital, a “reverse” vertical investment could potentially be of interest. This is to say that firms from these traditionally low-wage countries could potentially invest in more developed countries in order to quickly gain access to a high-skill labor-pool. If this is the case, then FDI in both directions would be of interest to observe, rather than just one direction as might be suggested in conventional vertical investment theory. This thought process might explain potential discrepancies between expected FDI based on distance and market size, and actual observations.
To summarize, the important theoretical components of this paper are that firms from one country identify similar foreign markets as being potentially profitable, and the means by which they serve these foreign markets is determined by the productivity of an individual firm. While there are several factors that affect whether a market is deemed profitable by firms, the central theory of this paper holds that distance (both physical and cultural) and market size are the two most prominent factors due to perceptions of risk and the involvement of all firms (and not just MNEs as is conventional in FDI theory) in FDI activity. Finally, growing markets are not only targets for investment, but have large firms capable of investing abroad themselves. This changing market outlook could potentially make international investment more reciprocal than before, and relationships that were previously identified as being “vertical” could potentially be “horizontal” in nature, which would make these new markets highly interesting for this study.
3 Empirical approach This study will use the macroeconomic approach to FDI as a framework for the empirical study. The reason for choosing a macroeconomic approach rather than the microeconomic firm-level approach is two-fold. Firstly, the gravity model of trade is a model that measures macroeconomic data and to use it in modeling microeconomic data would be problematic to say the least. Secondly, almost all empirical studies on FDI have been done using the macroeconomic approach due to availability of data and simplic
10
creating a feasible model. Essentially, the macroeconomic approach is more suited to observe how FDI flows in certain patterns, which is also the purpose of this paper. The idea behind the macroeconomic approach to FDI is that it emphasizes the determinants of why net investment among pairs or groups of nations tends to flow in certain patterns (Grosse, R. & Trevino, L.J. 1996). It attempts to explain FDI behavior with macroeconomic variables such as inflation, national income and exchange rate etc. (Trevino, L.J & Mixon Jr., F.G. 2004). As Grosse and Trevino (1996) demonstrate in their study of foreign FDI in the U.S, most macroeconomic studies on FDI focus on three separate groups of independent variables: 1) economic, such as GDP, per capita income, exchange rate, interest rates etc.; 2) political risk; and 3) distance in both absolute terms and cultural terms. Since this paper approaches FDI using the gravity model of trade, only those economic factors included in the gravity model such as GDP and the distance variable will be included explicitly. Political risk is an interesting variable since it not only pertains to societal and governmental affairs, but also includes operations costs as part of the overall risks involved in an investment. These operations costs can sometimes be attributed to cultural factors, which make political risk a highly interesting variable for this study. However, as Singh and Jun (1995) note in their paper, most empirical studies on political risk have not been statistically significant, rendering it a rather unreliable variable to
st
sweeping terms, well-off countries tend to have more stable institutions than poorer countries. Thus the most distinguishing variables used in this study will be home and host country GDP and GDP per-capita, as well as the distance between each country-pair. The reasoning behind including host country as well as home country GDP in the model is that host country market size is an indicator of potential returns on an investment and home countr
a
11
positively correlated with FDI, meaning the larger the market size the more FDI will be conducted. Per-capita income being included (aside from aforementioned proxy of risk) is built upon the concept that countries with similar markets tend to trade with each other more than dissimilar ones.7 As Helpman, Melitz & Yeaple (2004) mention in their proximity-concentration trade-off theory, higher productivity firms are more likely to engage in FDI activity and well-off countries are most likely to have higher productivity firms. Therefore it is reasonable to expect that home country per-capita GDP should have a positive effect on FDI. In addition Grosse and Trevino (1996) mention in their paper that demand patterns as well as firm behavior explain the trade between similar countries. This concept is especially interesting to this study since the data encompasses OECD member countries as well as the five co
sp
markets tend to be rather similar. Thus the per-capita income of the host country is also expected to have a positive impact on FDI. Distance is central to the gravity model of trade and I have included two variables in order to test its importance to FDI. Distance in this paper pertains to geographic distance and the language dummy serves as an indicator of cultural distance. The rationale behind including geographic distance to explain FDI is the greater cost of obtaining relevant information as well as the difficulties in managing affiliates in distant regions. Cultural distance may affect
common official language.
没弄完,字数受限,不知方向弄得对不对呢