Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

Abstract: Empirical trade economists have found that shocks on foreign direct investment (FDI) of some parent country in a host country affect the same parent country’s FDI in other hosts (interdependent hosts). Independent of this, there is evidence that shocks on a parent country’s FDI in some host economy affect other parent countries’ FDI in the same host (interdependent parents). In general equilibrium, shocks on FDI between any country pair will affect all country-pairs’ FDI in the world, including anyone of the two countries in a pair as well as third countries (interdependent third countries). No attempt has been made so far to allow simultaneously for all three modes of interdependence of FDI. Using cross-sectional data on FDI among 22 OECD countries in 2000, we employ a spatial feasible generalized two-stage least squares and generalized moments estimation framework to allow for all three modes of interdependence across all parent and host countries, thereby distinguishing between market-size-related and remainder interdependence. Our results highlight the complexity of multinational enterprises’ investment strategies and the interconnectedness of the world investment system.

Keywords: Foreign direct investment, Spatial econometrics, Generalized method of moments estimation

JEL-codes: C21; F21; F23 July 2013

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