Distance, Trade, and FDI: A Hausman-Taylor Sur Approach

WIFO Working Paper No. 164/2001

23 Pages Posted: 11 Nov 2001

See all articles by Michael Pfaffermayr

Michael Pfaffermayr

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

Peter H. Egger

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

Date Written: October 9, 2001

Abstract

This paper analyzes the effects of distance as a common determinant of exports and FDI in a three factors New Trade Theory model assuming that distance affects both pure trade costs and plant set-up costs. Exports and FDI are not necessarily substitutes with respect to distance since the predicted sign depends on its importance for fixed plant set-up costs relative to transportation costs. For the empirical specification, we suggest that the impact of time-invariant variables such as distance is most appropriately analyzed in a Hausman-Taylor SUR model. In our application, outward FDI is negatively affected by distance while its effect on exports is insignificant. Exports and outward FDI are complementary with respect to the time- invariant unobserved factors and also with respect to the majority of the exogenous observed determinants.

Keywords: Multinationals, new trade theory, panel econometrics

JEL Classification: C33, F12, F23

Suggested Citation

Pfaffermayr, Michael and Egger, Peter H., Distance, Trade, and FDI: A Hausman-Taylor Sur Approach (October 9, 2001). WIFO Working Paper No. 164/2001, Available at SSRN: https://ssrn.com/abstract=290059 or http://dx.doi.org/10.2139/ssrn.290059

Michael Pfaffermayr (Contact Author)

University of Innsbruck - Department of Economics ( email )

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Austria
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HOME PAGE: http://homepage.uibk.ac.at/~c43236/

Austrian Institute of Economic Research ( email )

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HOME PAGE: http://www.wifo.ac.at/Michael.Pfaffermayr/

Peter H. Egger

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment ( email )

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Munich, DE-81679
Germany
+49 0 89 9224 1238 (Phone)
+49 0 89 985369 (Fax)

HOME PAGE: http://www.cesifo-group.de/portal/page?_pageid=36,425628&_dad=portal&_schema=PORTAL

Ludwig-Maximilians University of Munich

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Munich, 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research

Poschinger Str. 5
Munich, DE-81679
Germany

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