Distance, Trade and FDI: A Hausman-Taylor SUR Approach

This paper analyzes the effects of distance as a common determinant of exports and FDI in a three factors New Trade Theory model assuming that distance affects both pure trade costs and plant set-up costs. Exports and FDI are not necessarily substitutes with respect to distance since the predicted sign depends on its importance for fixed plant set-up costs relative to transportation costs. For the empirical specification, we suggest that the impact of of time-invariant variables such as distance is most appropriately analyzed in a Hausman-Taylor SURmodel. In our application, outward FDI is negatively affected by distance while its effect on exports is insignificant. Exports and outward FDI are complementary with respect to the time-invariant unobserved factors and also with respect to the majority of the exogenous observed determinants.