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.
Highlights
Foreign direct investment is one of the most dynamic phenomena in the recent wave of globalization
Davies, Waddell, and Naughton (2005) come closest to our approach. They estimate specifications that are likewise inspired by the modern theory of multinational firms and apply spatial econometric techniques using foreign direct investment (FDI) and/or foreign affiliate sales (FAS) data with both a cross-section and a time dimension
They focus on the estimation of a spatial lag in a gravity-type model of bilateral U.S outbound FDI into the Organization for Economic Co-operation and Development (OECD)
Summary
Foreign direct investment is one of the most dynamic phenomena in the recent wave of globalization. Vertical MNEs engage in trade and seek to exploit 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. Davies, Waddell, and Naughton (2004) consider aggregate U.S outward FDI to developed economies at the country-level using pooled OLS in a spatial maximum likelihood setting. They find a negative coefficient for the spatially lagged FDI variable. Helpman, Melitz and Yeaple (2004), on the other hand, consider a multi-country, multi-sector general equilibrium model of national firms and horizontal MNEs. They study the impact of firm heterogeneity and other determinants on U.S exports and foreign affiliate sales.
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