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Revisiting the distance elasticity and investment motives in the FDI gravity model: Aggregate vs. sector-level evidence

By: Wacker, Konstantin M.

Contributor(s): Rebmann, Nicola.

Material type: materialTypeLabel

BookSeries: wiiw Working Papers: 268Publisher: Wien : Wiener Institut für Internationale Wirtschaftsvergleiche (wiiw), 2025Description: 71 S., 26 Tables and 8 Figures, 30cm.Subject(s): Gravity model | foreign direct investment | sector heterogeneityCountries covered: non specificwiiw Research Areas: International Trade, Competitiveness and FDIClassification: F21 | F23 Online resources: Click here to access online Summary: This paper re-examines foreign direct investment motives in the ‘FDI gravity’ model (Kleinert and Toubal, 2010), focusing on the role of distance. More precisely, we investigate whether aggregate and pooled gravity models for FDI obscure relevant heterogeneities across sectors. This is possible through the novel MREID dataset, which provides us with FDI data at the 2-digit NAICS level for 184 countries over the period 2010 to 2020. Our results reveal that aggregate and pooled models mask significant sector heterogeneities in two aspects: (i) in the importance of horizontal versus vertical FDI motives, and (ii) in the distance elasticity. The latter reflects that distance potentially captures more complex sector-specific components than are captured in the current gravity model for FDI.

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This paper re-examines foreign direct investment motives in the ‘FDI gravity’ model (Kleinert and Toubal, 2010), focusing on the role of distance. More precisely, we investigate whether aggregate and pooled gravity models for FDI obscure relevant heterogeneities across sectors. This is possible through the novel MREID dataset, which provides us with FDI data at the 2-digit NAICS level for 184 countries over the period 2010 to 2020. Our results reveal that aggregate and pooled models mask significant sector heterogeneities in two aspects: (i) in the importance of horizontal versus vertical FDI motives, and (ii) in the distance elasticity. The latter reflects that distance potentially captures more complex sector-specific components than are captured in the current gravity model for FDI.