I propose a network/search view of international trade in differentiated products. I present evidence that supports the view that proximity and common language/colonial ties are more important for differentiated products than for products traded on organized exchanges in matching international buyers and sellers, and that search barriers to trade are higher for differentiated than for homogeneous products. I also discuss alternative

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Much foreign direct investment (FDI) takes the form of mergers and acquisitions (M&A). It is commonplace in finance to view acquisitions as manifestations of the market for corporate control. Following on that insight we propose a model of FDI in which headquarters bid to control overseas assets. We derive an equation for bilateral FDI stocks that resembles the recently developed fixed effects approach to modelling bilateral trade flows. We estimate the model and use its parameters to construct benchmarks for evaluating multilateral inward and outward FDI. JEL classification: F21, F22, G34

This paper develops an approach for quantifying the relative importance of different sources of comparative advantage for country welfare in a global trade equilibrium. To explain the pattern of specialization, I present a multi-country, perfectly-competitive Ricardian model that extends Eaton and Kortum (2002) to predict industry trade flows. In this framework, comparative advantage is determined by the interaction of country and industry characteristics, with countries specializing in industries whose specific production needs they are best able to meet with their factor endowments, institutional environment, and technological strengths. I estimate the model parameters using a large dataset of bilateral trade flows, comprising 82 countries and 20 manufacturing industries. I present results from a baseline OLS approach, and a simulated method of moments (SMM) procedure that takes into account the prevalence of zero trade flows in the data. The SMM estimates imply large average welfare gains from a hypothetical reduction in distance barriers, with developing countries benefiting substantially more than the OECD. I also examine the induced shift in industry composition when countries raise their factor endowments or improve the quality of their institutions, and quantify the welfare gains generated by such policy moves.

Recent empirical analyses show that asset flows can be modeled by the same “gravity” equations that trade economists have used so successfully for the past few decades. This is something of a surprise. Trade economists do not yet have a unified theory of why gravity models should work—and the situation is worse for asset flows. Reasonable theories would predict that greater distance between countries should generate more asset flows rather than less as the econometric results seem to consistently show. In this paper we discuss how host and source country GDPs, language, and distance—the core explanatory variables in the traditional gravity models—fare in trade and asset flows estimations. While the “distance puzzle ” is not resolved, it is considerably reduced by going beyond consideration of physical distance to concepts of transactional distance and scale economies.

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We develop a simple information-based model of FDI flows. On the one hand, the abundance of “intangible " capital in specialized industries in the source countries, which presumably generates expertise in screening investment projects in the host countries, enhances FDI flows. On the other hand, host-country corporate-transparency diminish the value of this expertise, thereby reducing the flow of FDI. Empirical evidence (from a sample of 12 source countries and 45 host countries over the 1980s and 1990s) analyzed in a gravity-equation model, provides support to the theoretical hypotheses. The model also demonstrates that the gains for the host country from foreign direct investment (over foreign portfolio investment (FPI)) are reflected in a more efficient size of

Recent work by Anderson and van Wincoop (2003) establishes an empirical modeling strategy which takes full account of the structural, non-(log-)linear impact of trade barriers on trade in new trade theory models. This framework has never been used to evaluate and quantify the role of endogenous preferential trade agreement (PTA) membership for trade. Apart from paying attention to structural modeling of the impact of trade policy on trade, this paper aims at delivering an empirical model which takes into account both that preferential trade agreement membership is endogenous and that the world matrix of bilateral trade flows contains numerous zero entries. These features are treated in an encompassing way by means of (possibly two-part) Poisson pseudo-maximum likelihood estimation with endogenous binary indicator variables in the empirical model.

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During the 1980s, Japanese multinationals emerged as one of the top sources of overseas investment. However, Japan—the world’s second largest economy—continued to host only meagre amounts of foreign direct investment (FDI). Was Japan an overachiever for outward FDI and an underachiever for inward FDI?