Browsing by Subject "Gravity equation"

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Trade and FDI flows in the international economy
(2009) Spies, Julia; Belke, Ansgar
During the past decades, globalisation in all of its facets dominated many controversial debates of political leaders and common citizens and called the predominant attention of the international press and the scientific community. A major phenomenon in this context is the ongoing internationalisation of the economic activities of firms. The simultaneous interest in Foreign Direct Investment (FDI) and trade can be attributed to the fact that the two modes at times complement each other or conduce to alternatives in serving a foreign market. This thesis highlights some of the crucial questions that arise in this context. In Chapter 2, a new version of a theory-based gravity equation is developed to properly account for the relative price indices initially proposed by Anderson and van Wincoop (2003). The partially time-varying character of the multilateral resistance variables overcomes the bias present in earlier studies that solely rely on country or country pair fixed effects. Applying the augmented gravity equation to the process of EU integration during the 1990s, robust evidence is found that the Free Trade Agreements (FTAs) with the Central and Eastern European Countries (CEECs) have substantially increased intra-group trade, in the case of the Czech and Slovak Republic and Slovenia at the expense of the Rest of the World (ROW). Since decreasing multilateral trade resistance negatively influences a country?s bilateral imports but may be positively correlated with a bilateral FTA, earlier East-West studies, which ignore the relative price term?s time-varying character, tend to report downward biased coefficients. Indeed, the results indicate that once we correct for the omitted variable bias, the FTAs with the CEECs created between 7 and 20 percentage points more new trade compared to the scenario where only time-invariant country pair effects were included. Chapter 3 highlights the trade effects of monetary integration in Europe. The purpose is to assess the implications of the Economic and Monetary Union (EMU) accession of eight CEECs on their share of EMU-12 imports. Overcoming biases related to endogeneity, omitted variables and sample selection, the results indicate that the common currency has boosted intra-EMU imports by 7%. Under the assumption that the same relationship between the explanatory variables and imports will hold for EMU-CEEC trade, one can predict the future impact of the Euro. The findings of this exercise suggest that except for the least integrated countries, Poland, Latvia and Lithuania, all CEECs can expect increases in the EMU-12 import share. Chapter 4 assesses the determinants of location choices of foreign multinational firms at the level of German federal states. Based on a monopolistic competition model, firms decide for a certain location if the expected profits are higher than the profits associated with all other available locations. A conditional and a nested logit model resemble the structure of the location choice process of individual investors well. By using affiliate-level data between 1997 and 2005, the results confirm that firms react positively to local demand, a common border and existing firm networks, while unit labour costs exhibit the expected negative impact. These effects vary in their relevance across manufacturing and service affiliates, and between upstream and downstream activities. This thesis confirms that the determinants and effects of the internationalisation of economic activities are multifaceted. There are several interesting directions for future research that pick up aspects studied in Chapters 1 to 3. Only very recently, researchers started to investigate the particularities of cross-border activities within the service sector and the influence of (exchange rate) uncertainty on foreign investments. These issues will give new insights into the determinants of FDI flows and the prerequisites and impacts of FTAs and currency unions that may complement, weaken or strengthen the points made in the present thesis.
Trade effects of the Europe agreements
(2006) Spies, Julia; Marques, Helena
The eastern enlargement of the European Union (EU) brought and will bring full membership to countries whose trade barriers with the EU had to a large extent already been removed under Free Trade Agreements (FTAs) during the 1990s. We employ a theory-based new version of a gravity equation, whose specification allows for an assessment of the impact of the arrangements on extra- and intra-group imports. We find robust evidence that the agreements have substantially increased intra-group trade, in the case of the Czech and Slovak Republic at the expense of the Rest of the World (ROW).