Which Countries Export FDI, and How Much?

HKIMR Working Paper No. 15/2004

36 Pages Posted: 23 Aug 2007

See all articles by Assaf Razin

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Yona Rubinstein

Tel Aviv University - Eitan Berglas School of Economics

Efraim Sadka

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Multiple version iconThere are 3 versions of this paper

Date Written: August 2004

Abstract

The paper develops a model with lumpy setup costs, which govern the flow of bilateral foreign direct investment (FDI). Every country is potentially both a source for FDI flows to several host countries, and a host for FDI flows from several source countries. But technologically-advanced countries have a comparative advantage in setting up foreign subsidiaries. Thus, the model generates two-way, rich-rich and rich-poor, FDI flows. We employ a sample of 24 OECD countries, over the period 1981-1998. We observe many pairs of countries with no FDI flows between them. Zero reported flows could indicate either true zeros stemming from marginal productivity conditions, measurment errors, or true zeroes that are due to fixed costs (which dominate marginal productivity conditions). Previous empirical literature on the determinants of FDI flows imposes a no-fixed cost assumption on the estimation procedure (Tobit). In contrast, by employing the Heckman selection procedure, we show that the Tobit restriction is not consistent with the data, and yields biased estimates. Controlling for the selection into source-host pairs of countries, and for time and country fixed effects, we find: (1) FDI flows respond positively to advances in host country level of education relative to the source country level of education, whereas the source-country level of education is a predictor of the formation of source-host country pairs; (2) FDI flows respond positively to improvements in host country financial risk ratings relative to the source country ratings; (3) existence of rich-poor pairs hinge on surpassing an education-income threshold, whereas rich-rich FDI flow volumes depend on education and income levels.

Suggested Citation

Razin, Assaf and Rubinstein, Yona and Sadka, Efraim, Which Countries Export FDI, and How Much? (August 2004). HKIMR Working Paper No. 15/2004. Available at SSRN: https://ssrn.com/abstract=1009013 or http://dx.doi.org/10.2139/ssrn.1009013

Assaf Razin (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 7303 (Phone)
+972 3 640 9908 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Yona Rubinstein

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 5828 (Phone)
+972 3 640 9908 (Fax)

Efraim Sadka

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 9712 (Phone)
+972 3 642 8074 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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