Gravity, Counterparties, and Foreign Investment

76 Pages Posted: 15 Mar 2018 Last revised: 31 Jul 2019

See all articles by Cristian Badarinza

Cristian Badarinza

National University of Singapore (NUS)

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Chihiro Shimizu

Nihon University

Multiple version iconThere are 2 versions of this paper

Date Written: July 30, 2019


International trade and investment flows obey gravity relationships, posing a continuing puzzle. New data on cross-border commercial real-estate investment flows show that they obey gravity, but this relationship is rendered insignificant by controlling for the presence of counterparties from origin countries in destination countries. We attribute this to a strong, robust tendency for preferential matching with same-country counterparties. We set up an equilibrium matching model with a contracting/trust friction affecting different-nationality transactions. The model explains the persistent success of gravity using the friction and the fact that the spatial distribution of same- nationality counterparties is well-explained by historical links between countries.

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 (July 30, 2019). Available at SSRN: or

Cristian Badarinza (Contact Author)

National University of Singapore (NUS) ( email )

1E Kent Ridge Road
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Singapore, 119228

Tarun Ramadorai

Imperial College London ( email )

South Kensington Campus
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United Kingdom


Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

European Corporate Governance Institute (ECGI) ( email )

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Chihiro Shimizu

Nihon University ( email )

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Tokyo, Tokyo 154-8513
+81-3-6453-1715 (Phone)
+81-3-6453-1630 (Fax)

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