Fixed Costs, Foreign Direct Investment, and Gravity with Zeros
Loading...
Date
2006-06
Authors
Davies, Ronald B.
Kristjánsdóttir, Helga
Journal Title
Journal ISSN
Volume Title
Publisher
University of Oregon, Dept of Economics
Abstract
Fixed costs play a crucial role in current models of foreign direct investment (FDI), yet
they are almost entirely ignored in empirical treatments of FDI. We fill this gap by using
a 1989-2001 panel of FDI flows into Iceland to examine the determinants of fixed costs
for multinational firms and how these influence aggregate patterns of investment. Our
additions to research in the field include usage of several natural resource variables, and
the analysis of data on initial entry of FDI into a developed country. We use Heckman
two step procedure, which allows us to account for fixed costs and their impact on
estimation. Taken together, we find that the standard OLS approach to the data
incorrectly links the quantity of FDI to source country variables while in fact most of
their role is in determining whether FDI takes place at all.
Description
26 p.
Keywords
Foreign direct investment, Multinational enterprises, Fixed costs