Trade-FDI Linkages in a System of Gravity Equations for German Regional Data

52 Pages Posted: 6 Apr 2009

See all articles by Timo Mitze

Timo Mitze

Gesellschaft für Okonomische Regionalanalysen (GEFRA)

Björn Alecke

GEFRA

Gerhard Untiedt

Gesellschaft für Okonomische Regionalanalysen (GEFRA)

Date Written: January 1, 2009

Abstract

We analyse the nature of German trade-FDI linkages within the EU27 based on a simultaneous equation gravity approach for imports, exports, in- and outward FDI stocks. We adopt both a Hausman-Taylor (1981) IV approach (3SLS-GMM) and rival non-IV estimation (the system extension to the Fixed Effects Vector Decomposition model recently proposed by Pluemper & Troeger, 2007). Turning to the results, both estimators give empirical support for our chosen gravity setup as an appropriate framework in explaining German trade and FDI activity. Looking carefully at cross-variable linkages we basically find substitutive links between trade flows and outward FDI in line with earlier empirical evidence for Germany. Building upon German state level data we are also able to analyse the sensitivity of the results for regional sub-samples. The latter disaggregation hints at structural differences among the trade and FDI activity of the two West and East German macro regions on the one hand, and also their interaction with the 'core' EU15 member states opposed to the overall EU27 aggregate on the other hand. Taking West German-EU27 trade & FDI as an example, the identified pairwise linkages closely follow the theoretical predictions of New Trade Theory models as in Baldwin & Ottaviano (2001): That is, when trade is merely of intra-industry type with non-zero trade costs, we observe export replacement effects of FDI. However, at the same time outward FDI stimulates trade via reverse good imports. For the West German-EU15 sub-sample we even reveal complementaries among export and outward FDI activity. This strongly advocates to care for the regional dimension in analysing cross-variable linkages of trade and FDI.

Keywords: Trade, FDI, panel data, simultaneous equations

JEL Classification: C33, F14, F21

Suggested Citation

Mitze, Timo and Alecke, Björn and Untiedt, Gerhard, Trade-FDI Linkages in a System of Gravity Equations for German Regional Data (January 1, 2009). Ruhr Economic Paper No. 84, Available at SSRN: https://ssrn.com/abstract=1373791 or http://dx.doi.org/10.2139/ssrn.1373791

Timo Mitze (Contact Author)

Gesellschaft für Okonomische Regionalanalysen (GEFRA) ( email )

Salzmannstr. 152
48159 Muenster
Germany

Björn Alecke

GEFRA ( email )

Ludgeristr. 56
48143 Muenster
Germany

Gerhard Untiedt

Gesellschaft für Okonomische Regionalanalysen (GEFRA) ( email )

Salzmannstr. 152
48159 Muenster
Germany

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