Gravity, Counterparties, and Foreign Investment

Chihiro Shimizu
Authors registered in the RePEc Author Service: Tarun Ramadorai

No 13491, CEPR Discussion Papers from Centre for Economic Policy Research

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 (search for similar items in EconPapers)
JEL-codes: D83 F14 F30 G11 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-int and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Journal Article: Gravity, counterparties, and foreign investment (2022)
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