Explaining German outward FDI in the EU: a reassessment using Bayesian model averaging and GLM estimators

Abstract

The last decades have seen an increasing interest in FDI and the process of production fragmentation. This has been particularly important for Germany as the core of the European Union (EU) production hub. This paper attempts to provide a deeper understanding of the drivers of German outward FDI in the EU for the period 1996–2012 by tackling the two main challenges faced in the modelization of FDI, namely the variable selection problem and the choice of the estimation method. For that purpose, we first extend previous BMA analysis developed by Camarero et al. (Econ Model 83:326–345, 2019) by including country-pair-fixed effects to select the appropriate set of variables. Second, we compare several estimation methods in their multiplicative form, namely four versions of the generalized linear model. The results of the empirical application indicate that Gamma pseudo-maximum likelihood is the best performing estimator. Furthermore, our results point to horizontal-ness as the primary strategy for German investment in core EU countries, while vertical-ness seems to prevail in peripheral EU countries.