Explaining asymmetries in bilateral FDI flows

Abstract

This paper constructs a two-stage monopolistic competition model that explains the large number of zeros and missing bilateral FDI flows, as well as positive bilateral FDI flows we observe in the data. A Heckman two-step selection procedure is used to empirically estimate the model by employing data for 101 countries from 1995 to 2002. I show that certain characteristics previously considered important to determine FDI flows in traditional OLS estimations may only matter for multinationals selecting into FDI relationships, and in some cases, they may even negatively affect FDI flows.