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Estimating the Impact of Time-Invariant Variables on FDI with Fixed Effects

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Abstract

This paper applies the panel fixed effects with vector decomposition estimator to three FDI data sets to estimate the impact of time-invariant variables on FDI while including fixed effects. We find that the omission of fixed effects significantly biases the results, leading to contradictory predictions regarding the effect of trade costs and culture across data sets. After eliminating these biases, the differences across data sets largely disappear and many time-invariant variables consistently indicate the importance of vertical FDI. This suggests that some controversies in the literature may be driven by the extent to which unaccounted fixed effects biases vary across different data sets.

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Author information

Authors and Affiliations

  1. Department of Economics, University of Oregon, 435 PLC Building, 1285, 97405, Eugene, OR, USA

    Ronald B. Davies

  2. Copenhagen Business School, Copenhagen, Denmark

    Delia Ionascu

  3. University of Iceland, Reykjavik, Iceland

    Helga Kristjánsdóttir

Authors
  1. Ronald B. Davies
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  2. Delia Ionascu
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  3. Helga Kristjánsdóttir
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Corresponding author

Correspondence to Ronald B. Davies.

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JEL no.

F14, F23

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Davies, R., Ionascu, D. & Kristjánsdóttir, H. Estimating the Impact of Time-Invariant Variables on FDI with Fixed Effects. Rev World Econ 144, 381–407 (2008). https://doi.org/10.1007/s10290-008-0153-0

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  • DOI: https://doi.org/10.1007/s10290-008-0153-0

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