The Gravity Equation in International Economics and International Business Research: A Note

Michele Fratianni, Francesco Marchionne () and Chang Hoon Oh

No 2010-08, Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy

Abstract: This note discusses methodological issues and practical concerns for international economists and international business scholars who apply the gravity equation in their research. The most important message of the note is that this equation should correct for multilateral resistance factors. We propose a relatively low-cost specification and estimation to implement such correction, which is robust in the presence of various endogeneity effects and non-stationary variables. In the presence of zero-values in the dataset, however, the multilateral specification is best estimated with a Poisson maximum likelihood.

Keywords: gravity equation; international trade; foreign direct investment; methodology (search for similar items in EconPapers)
JEL-codes: C1 F1 F2 (search for similar items in EconPapers)
Date: 2010-08
New Economics Papers: this item is included in nep-ecm and nep-int
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