Estimating Models of Complex FDI: Are There Third-Country Effects?
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Syracuse University SURFACE Maxwell School of Citizenship and Public Center for Policy Research Affairs 2005 Estimating Models of Complex FDI: Are There Third-Country Effects? Badi H. Baltagi Syracuse University, [email protected] Peter Egger University of Munich Michael Pfaffermayr University of Innsbruck Follow this and additional works at: https://surface.syr.edu/cpr Part of the International Economics Commons Recommended Citation Baltagi, Badi H.; Egger, Peter; and Pfaffermayr, Michael, "Estimating Models of Complex FDI: Are There Third-Country Effects?" (2005). Center for Policy Research. 91. https://surface.syr.edu/cpr/91 This Working Paper is brought to you for free and open access by the Maxwell School of Citizenship and Public Affairs at SURFACE. It has been accepted for inclusion in Center for Policy Research by an authorized administrator of SURFACE. For more information, please contact [email protected]. ISSN: 1525-3066 Center for Policy Research Working Paper No. 73 ESTIMATING MODELS OF COMPLEX FDI: ARE THERE THIRD-COUNTRY EFFECTS? Badi H. Baltagi, Peter Egger, and Michael Pfaffermayr Center for Policy Research Maxwell School of Citizenship and Public Affairs Syracuse University 426 Eggers Hall Syracuse, New York 13244-1020 (315) 443-3114 | Fax (315) 443-1081 e-mail: [email protected] October 2005 $5.00 Up-to-date information about CPR’s research projects and other activities is available from our World Wide Web site at www-cpr.maxwell.syr.edu. All recent working papers and Policy Briefs can be read and/or printed from there as well. CENTER FOR POLICY RESEARCH – Fall 2005 Timothy Smeeding, Director Professor of Economics & Public Administration __________ Associate Directors Margaret Austin Douglas Holtz-Eakin Associate Director, Professor of Economics Budget and Administration Associate Director, Center for Policy Research Douglas Wolf John Yinger Professor of Public Administration Professor of Economics and Public Administration Associate Director, Aging Studies Program Associate Director, Metropolitan Studies Program SENIOR RESEARCH ASSOCIATES Badi Baltagi............................................ Economics Jeff Kubik ...............................................Economics Pablo Beramendi............................Political Science Andrew London ......................................... Sociology Dan Black............................................... Economics Len Lopoo ............................... Public Administration Lloyd Blanchard ..................... 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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. Key words: Mutlinational firms; Complex FDI; Panel econometrics; Spatial econo- metrics; Generalized moments (GM) estimators JEL classification: C33; F14; F15 ∗Badi H. Baltagi: Department of Economics and Center for Policy Research, 426 Eggers Hall, Syracuse University, Syracuse, NY 13244-1020 U.S.A.; [email protected]; ∗∗Peter Egger: Ifo Institute for Economic Research and University of Munich, Poschingerstrasse 5, D-81679 Munich, Germany; [email protected]; ∗∗∗Michael Pfaffermayr: Department of Economics, University of Innsbruck, Universitaetsstrasse 15, 6020 Innsbruck, Austria and Austrian Institute of Economic Research, P.O.-Box 91, A-1103 Vienna, Austria; Michael.Pfaff[email protected]. Financial support from the Austrian Fonds zur Foerderung der wissenschaftichen Forschung through grant P17028-G05 is gratefully acknowledged. The authors would like to thank Harry Kelejian and three anonymous referees for their constructive comments and suggestions. 1 1 Introduction Foreign direct investment is one of the most dynamic phenomena in the recent wave of globalization. The World Investment Report and the United Nations’ World Trade Data Base suggest that during the last decade worldwide outward foreign direct invest- ment (FDI) stocks rose almost 1.5 times faster than exports, even faster than exports of intermediate goods. For the last two decades, the theory of trade and multinational firms has paid attention to this phenomenon, in particular to the organization of firms across international borders. Early stages of this theory distinguish between two modes of multinational enterprises (MNEs). Vertical MNEs engage in trade and seek to ex- ploit international factor price differentials. They locate their headquarters in the skilled labor-abundant parent country and engage in unskilled labor-intensive production in an unskilled labor-abundant host. This type of MNEs serves the parent market via foreign affiliate exports (Helpman, 1984, Helpman and Krugman, 1985). Horizontal MNEs seek to save on trade costs by serving markets locally rather than trading. This results in higher fixed investment costs than those incurred by exporting national firms (Markusen, 1984, Markusen and Venables, 2000). The recent literature has considered three important extensions. First, both modes of MNE entry have been merged in the “knowledge-capital” model of multinationals (Carr, Markusen and Maskus, 2001, Markusen, 2002). Depending on factor endowments, as well as on trade and investment impediments, the equilibrium configuration of horizontal