Multinational Firms’ Location and the New Economic Geography
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Multinational Firms’ Location and the New Economic Geography

  • New Horizons in International Business series

Edited by Jean-Louis Mucchielli and Thierry Mayer

This book analyses how foreign direct investors choose their locations, whilst exploring the forces which shape international economic geography. Although these two issues are, to some extent, inter-related, researchers have only recently acknowledged the similarity of economic geography and international business approaches to the empirical assessment of likely causes of the degree of spatial concentration observed in many modern industries.
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Chapter 3: Trade, border effects and individual characteristics: a panel specification with instrumental variables estimators

José De Sousa and Anne-Célia Disdier

Extract

3. Trade, border effects and individual characteristics: a panel specification with instrumental variables estimators José De Sousa and Anne-Célia Disdier INTRODUCTION 3.1 Although trade flows are growing and tariff and non-tariff barriers are decreasing worldwide, borders still influence the pattern of commercial transactions. This fact is highlighted by the border effects methodology which offers an evaluation of the borders’ impact on trade (McCallum, 1995; Helliwell, 1996; Wei, 1996; Wolf, 1997; Head and Mayer, 2000).1 Size for size and distance for distance, the trade within a given geographical unity (area, country, and so on) appears higher than that observed with a given external partner. Measures of border effects are generally carried out with ordinary least squares (OLS) regressions. These estimations are sometimes conducted using the Heckman’s correction in order to take into account null flows (Head and Mayer, 2000; 2002). The objective of this chapter is to wonder about the relevance of such an econometric approach and test the robustness of the results obtained from the OLS estimates. In fact, cross-section estimations tend to ignore the unobservable characteristics2 of bilateral trade relations, such as historical, cultural and linguistic links or the presence of minorities. The existence of a potential correlation between these unobservable characteristics and a subset of the explanatory variables runs the risk of obtaining biased estimates. The traditional method to eliminate this correlation consists in using the within estimator. In transforming the data into deviations from individual means, the within estimator...

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