Estimating Outward FDI Flows under the Heterogeneous Firm Model: A Case Study of Selected Asian Economies

Panutat Satchachai; Kornkarun Cheewatrakoolpong

Authors

Panutat Satchachai Faculty of Economics, Chulalongkorn University, Thailand
Kornkarun Cheewatrakoolpong Faculty of Economics, Chulalongkorn University, Thailand

Keywords:

Bilateral Outward FDI, Heckman Two-Step Estimation, Firm Heterogeneity Models

Abstract

The problem with FDI flows is that zero or negative flows are being ignored or handled differently. This paper modifies the heterogeneous firm model proposed by Helpman et al. (2008) and examines the determinants of the bilateral outward foreign direct investment (FDI) flows. Given the significance of developing Asian economies as outward investors in the early 2000s, we use a unique dataset on bilateral outward FDI flows of selected Asian economies between 2001 and 2012 to find the determinants of outward FDI with different econometric models. The findings indicate that the determinants of the home economy are quite context-specific, and the determinants of outward FDI from the South are different from the traditional Ownership, Location, and Internationalization (OLI) theory. We find that in the whole sample, the determinants of the outward FDI are consistent with the vertical FDI, where the overseas investment is to relocate and integrate the production process in the GVC, while the determinants of the South align with the horizontal FDI, where overseas investment is to overcome the disadvantages such as trade barriers. In addition, we find that the familiarity with the host economies holds greater significance for the South. We also find that the performance of the heterogeneous firm model is superior to the conventional augmented gravity model. In addition to the selection bias, the productivity threshold or “firm heterogeneity” should be included in estimation to control for further bias when the zero flows are ignored.

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