Document Type

Article

Language

eng

Format of Original

11 p.

Publication Date

5-2014

Publisher

Wiley

Source Publication

Review of International Economics

Source ISSN

0965-7576

Abstract

In empirical models of foreign direct investment (FDI), distance is most often used to proxy for transportation costs and other pure-trade costs. Given that distance is time invariant but transportation costs are not, this approach is less than satisfactory when actual transportation costs rise and fall over time. The contribution of this work is to explicitly control for transportation costs and thereby better understand their impact on FDI. We explore the impact of shipping costs on total US FDI stocks abroad, manufacturing stocks and service stocks using measures of sea-shipping and air-shipping costs in a Hausman–Taylor model that controls for endogeneity and allows for time-invariant variables such as distance. We find that transportation costs have a positive and statistically significant relationship with US total and manufacturing FDI, suggesting a substitute relationship between FDI and trade flows consistent with horizontal MNE activity. As one would expect, these costs are insignificant for service stocks.

Comments

Accepted version. Review of International Economics, Vol. 22, No. 2 (May 2014): 299-309. DOI. © 2011 Wiley. Used with permission.

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