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

Syracuse University Center for Policy Research Working Paper No. 73

36 Pages Posted: 20 Apr 2011

See all articles by Badi H. Baltagi

Badi H. Baltagi

Syracuse University; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics; Syracuse University - Maxwell School of Citizenship and Public Affairs

Peter H. Egger

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment; ETH Zürich; Ludwig-Maximilians University of Munich; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Michael Pfaffermayr

University of Innsbruck - Department of Economics; Austrian Institute of Economic Research

Date Written: October 1, 2005

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.

Keywords: Mutlinational firms, Complex FDI, Panel econometrics, Spatial econometrics, Generalized moments (GM) estimators

JEL Classification: C33, F14, F15

Suggested Citation

Baltagi, Badi H. and Egger, Peter H. and Pfaffermayr, Michael, Estimating Models of Complex FDI: Are There Third-Country Effects? (October 1, 2005). Syracuse University Center for Policy Research Working Paper No. 73, Available at SSRN: https://ssrn.com/abstract=1815215 or http://dx.doi.org/10.2139/ssrn.1815215

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Peter H. Egger

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