Trade-FDI Linkages in a Simultaneous Equations System of Gravity Models for German Regional Data

Timo Mitze

Chapter Chapter 5 in Empirical Modelling in Regional Science, 2012, pp 123-164 from Springer

Abstract: Abstract We analyze the nature of German trade-FDI linkages within the EU27 for a system of gravity equations, modelling imports, exports, inward and outward FDI stocks. Using regional data, we are able to estimate both aggregate as well as regionally disaggregated specifications. Our identification strategy rests upon the idea that we are able to identify long-run trade and FDI correlations in a flexible gravity approach, which allows us to control for common factors driving internationalization. Starting from the macroeconomic perspective, our analysis supports earlier empirical evidence for Germany in finding substitutive links between trade and outward FDI. However, switching to the (macro-)regional perspective, we reveal additional correlations, which can be motivated by recent theoretical approaches. For example, West German to EU27 trade-FDI linkages closely follow New Trade Theory models predicting export replacement effects of FDI. However, at the same time, outward FDI are found to stimulate trade via reverse good imports. For the West German to EU15 sub-aggregate, we reveal complementaries among export and outward FDI activity likely driven by a greater degree of similarity in the respective levels of development. On the contrary, for the East German economy, we mainly get substitutive linkages of EU wide trade and FDI. This regional heterogeneity emphasizes the need to take into account the regional dimension in analyzing cross-variable linkages between trade and FDI.

Keywords: Gravity Model; Relative Factor Endowment; East German State; Overidentification Test; East German Economy (search for similar items in EconPapers)
Date: 2012
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Journal Article: Trade-FDI Linkages in a Simultaneous Equations System of Gravity Models for German Regional Data (2010)
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DOI: 10.1007/978-3-642-22901-5_5

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