Gravity, Counterparties, and Foreign Investment

81 Pages Posted: 15 Mar 2018 Last revised: 20 Jul 2021

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

The University of Tokyo; Nihon University

Multiple version iconThere are 2 versions of this paper

Date Written: July 16, 2021

Abstract

We propose a new explanation for the persistence of gravity in international investment flows based on new facts about large cross-border commercial real-estate transactions. Buyers in these transactions preferentially match with counterparties from own or proximate countries; such affinity-based matching helps to alleviate financial investment frictions. We set up and structurally estimate a model of capital allocation in a decentralized market with an investment friction, which delivers the price, volume, and counterparty matching patterns in the data. The model shows that if clusters of high-affinity counterparties lie along historical routes, as in the data, preferential matching can perpetuate gravity relationships.

Keywords: Gravity, Foreign investment, Commercial real estate, Investment frictions, 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 16, 2021). 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 )

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Tarun Ramadorai

Imperial College London ( email )

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Chihiro Shimizu

The University of Tokyo ( email )

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