Bilateral FDI Potentials for Austria

Trade economists have long considered gravity models to estimate unexhausted potentials for bilateral trade. Similar to the discrepancy between "normal" and "actual" bilateral trade, one may ask the question about the difference between "normal" and actual bilateral multinational activity. However, with multinational activity, zero bilateral data and heteroscedasticity are very important, even more so than with trade data. Therefore, this paper suggests using generalised linear rather than log-linear models to specify "normal" FDI and obtain estimates of unexhausted FDI potentials. It uses panel data on Austria's bilateral multinational activity across 25 countries and 7 country blocs, 4 sectors and 13 years to illustrate the disadvantage of log-linear model estimation at quasi-maximum likelihood estimation.