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Estimating the Impact of Time-Invariant Variables on FDI with Fixed Effects

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  • Ronald B. Davies
  • Delia Ionascu
  • Helga Kristjánsdóttir

Abstract

This paper applies the panel fixed effects with vector decomposition estimator to three FDI datasets to estimate the impact of time-invariant variables on FDI while including fixed effects. We find that the omission of fixed effects significantly biases several of these variables, especially those proxying for trade costs and culture. After including fixed effects, we find that many time-invariant variables indicate the importance of vertical FDI. We also find that by eliminating these biases, the differences across datasets largely disappear. Thus, controversies in the literature that are driven by differences in data sets may be resolved by using this estimation technique.

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  • Ronald B. Davies & Delia Ionascu & Helga Kristjánsdóttir, 2007. "Estimating the Impact of Time-Invariant Variables on FDI with Fixed Effects," The Institute for International Integration Studies Discussion Paper Series iiisdp228, IIIS.
    • Handle: RePEc:iis:dispap:iiisdp228
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    Cited by:

    1. Hellmanzik, Christiane & Schmitz, Martin, 2015. "Virtual proximity and audiovisual services trade," European Economic Review, Elsevier, vol. 77(C), pages 82-101.
    2. Céline Azémar & Rodolphe Desbordes, 2010. "Short‐run Strategies for Attracting Foreign Direct Investment," The World Economy, Wiley Blackwell, vol. 33(7), pages 928-957, July.
    3. Adeel-Farooq, Rana Muhammad & Riaz, Muhammad Faraz & Ali, Tariq, 2021. "Improving the environment begins at home: Revisiting the links between FDI and environment," Energy, Elsevier, vol. 215(PB).
    4. Harms, Philipp & Knaze, Jakub, 2021. "Bilateral de-jure exchange rate regimes and foreign direct investment: A gravity analysis," Journal of International Money and Finance, Elsevier, vol. 117(C).
    5. James R. Markusen, 2021. "Putting per-capita income back into trade theory," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 10, pages 187-197, World Scientific Publishing Co. Pte. Ltd..
    6. Thomas O'Connor & Thomas Flavin, 2013. "The Effects of Ownership Structure on Corporate Financing Decisions: Evidence from Stock Market Liberalization," International Review of Finance, International Review of Finance Ltd., vol. 13(3), pages 383-405, September.
    7. Helga Kristjansdottir & Fjola Bjork Karlsdottir, 2020. "Uk Foreign Direct Investment In The Oecd, Culture And Geography," Baltic Journal of Economic Studies, Publishing house "Baltija Publishing", vol. 6(5).
    8. Harms, Philipp & Shuvalova, Daria, 2020. "Cultural distance and international trade in services: A disaggregate view," Economic Systems, Elsevier, vol. 44(2).
    9. Guðmundur Kristján Óskarsson & Helga Kristjánsdóttir, 2021. "EU Country and EFTA Country Export Differences," JRFM, MDPI, vol. 14(4), pages 1-8, March.
    10. Thomas O'Connor, 2014. "Legal bonding, investor recognition, and cross-listing premia in emerging markets," International Journal of Accounting and Finance, Inderscience Enterprises Ltd, vol. 4(3), pages 209-239.
    11. Hoch, Felix & Seyberth, Lilo, 2021. "How institutions moderate the effect of gender diversity on firm performance," Discussion Papers of the Institute for Organisational Economics 11/2021, University of Münster, Institute for Organisational Economics.
    12. Bojnec, Štefan & Ferto, Imre, 2014. "Outward Foreign Direct Iinvestments and Merchandise Exports: The European OECD Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 87-99, June.
    13. Hellmanzik, Christiane & Schmitz, Martin, 2017. "Taking gravity online: The role of virtual proximity in international finance," Journal of International Money and Finance, Elsevier, vol. 77(C), pages 164-179.
    14. Wacker, Konstantin M., 2013. "On the measurement of foreign direct investment and its relationship to activities of multinational corporations," Working Paper Series 1614, European Central Bank.
    15. Thomas O'Connor, 2012. "Investability, Corporate Governance and Firm Value," Economics Department Working Paper Series n223-12.pdf, Department of Economics, National University of Ireland - Maynooth.
    16. Imre Ferto & Attila Jambor, 2015. "Drivers of vertical intra-industry trade: the case of the Hungarian agri-food sector," Agricultural Economics, International Association of Agricultural Economists, vol. 46(1), pages 113-123, January.
    17. Helga Kristjánsdóttir & Stefanía Óskarsdóttir, 2021. "European FDI in Ireland and Iceland: Before and after the Financial Crisis," JRFM, MDPI, vol. 14(1), pages 1-12, January.
    18. Shin, Sunny Y. & McKenzie, Jordi & Crosby, Paul, 2024. "Cultural affinity and international trade in motion pictures: Empirical evidence using categorised internet search activity," Economic Modelling, Elsevier, vol. 136(C).
    19. Jungmittag, Andre, 2014. "Der Trade-off zwischen deutschen Direktinvestitionen und Exporten: Wie wichtig sind die verschiedenen Dimensionen der Distanz?," Working Paper Series 04, Frankfurt University of Applied Sciences, Faculty of Business and Law.

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    More about this item

    Keywords

    Foreign Direct Investment; Trade Costs; Culture;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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