Gravity, Counterparties, and Foreign Investment

77 Pages Posted: 15 Mar 2018 Last revised: 31 Jan 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)

Chihiro Shimizu

Nihon University

Multiple version iconThere are 2 versions of this paper

Date Written: January 24, 2019

Abstract

Gravity models excel at explaining international trade and investment flows; their success poses a continuing puzzle. In a comprehensive dataset of global commercial real-estate investments, we find that the role of distance in the gravity model is well-explained by preferential matching between counterparties of the same nationality. This tendency for same-country matching is widespread, robust, and increases in poorly-governed locations. We structurally estimate an equilibrium matching model with a friction affecting different-nationality transactions. The model explains the persistent success of gravity using a combination of this friction and the spatial distribution of same-nationality counterparties, which is well-predicted by current and historical linguistic, cultural, and trade 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 (January 24, 2019). 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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