The Local Structure of Globalization

Abstract

We study the evolution of the network of foreign direct investment (FDI) in the international electricity industry during the period 1994-2003. We assume that the ties in the network of investment relations between countries are created and deleted in continu- ous time, according to a conditional Gibbs distribution. This assumption allows us to take simultaneously into account the aggregate predictions of the well-established gravity model of international trade as well as local dependencies between network ties connecting the countries in our sample. According to the modified version of the gravity model that we specify, the probability of observing an investment tie between two countries depends on the mass of the economies involved, their physical distance, and the tendency of the network to self-organize into local configurations of network ties. While the limiting distribution of the data generating process is an exponential random graph model, we do not assume the system to be in equilibrium. We find evidence of the effects of the standard gravity model of international trade on evolution of the global FDI network. However, we also provide ev- idence of significant dyadic and extra-dyadic dependencies between investment ties that are typically ignored in available research. We show that local dependencies between national electricity industries are sufficient for explaining global properties of the network of foreign direct investments. We also show, however, that network dependencies vary significantly over time giving rise to a time-heterogeneous localized process of network evolution.