Gravity, Counterparties, and Foreign Investment

74 Pages Posted: 15 Mar 2018 Last revised: 19 Nov 2018

See all articles by Cristian Badarinza

Cristian Badarinza

National University of Singapore (NUS)

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR)

Chihiro Shimizu

Nihon University

Date Written: November 18, 2018

Abstract

Gravity models excel at explaining international trade and investment flows; their success poses a continuing puzzle. In a comprehensive dataset of global investments in commercial real estate, the role of distance in the gravity model is well explained by preferential matching between counterparties (buyers and sellers) of the same nationality. This tendency is robust, and increases in poor and poorly-governed locations. We structurally estimate an equilibrium matching model with a friction that affects different-nationality counterparty transactions. The model explains the persistent success of gravity using preferential matching with same-nationality counterparties, and observed location choices of counterparties.

Keywords: Gravity, Foreign investment, Commercial real estate, Trust, Matching, Cross-border flows

JEL Classification: D83, F14, F30, G11

Suggested Citation

Badarinza, Cristian and Ramadorai, Tarun and Shimizu, Chihiro, Gravity, Counterparties, and Foreign Investment (November 18, 2018). Available at SSRN: https://ssrn.com/abstract=3141255 or http://dx.doi.org/10.2139/ssrn.3141255

Cristian Badarinza (Contact Author)

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Tarun Ramadorai

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Chihiro Shimizu

Nihon University ( email )

3-34-1, Shimouma
Tokyo, Tokyo 154-8513
Japan
+81-3-6453-1715 (Phone)
+81-3-6453-1630 (Fax)

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