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Discussion Paper Details

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Title: Gravity, Counterparties, and Foreign Investment

Author(s): Cristian Badarinza, Tarun Ramadorai and Chihiro Shimizu

Publication Date: January 2019

Keyword(s): Commercial real estate, Cross-border flows, Foreign investment, Gravity, Matching and Trust

Programme Area(s): Financial Economics, International Macroeconomics and Finance and International Trade and Regional Economics

Abstract: Gravity models excel at explaining international trade and investment flows; their success poses a continuing puzzle. In a comprehensive dataset of global commercial real-estate investments, we find that the role of distance in the gravity model is well-explained by preferential matching between counterparties of the same nationality. This tendency for same-country matching is widespread, robust, and increases in poorly-governed locations. We structurally estimate an equilibrium matching model with a friction affecting different-nationality transactions. The model explains the persistent success of gravity using a combination of this friction and the spatial distribution of same-nationality counterparties, which is well-predicted by current and historical linguistic, cultural, and trade links between countries.

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Bibliographic Reference

Badarinza, C, Ramadorai, T and Shimizu, C. 2019. 'Gravity, Counterparties, and Foreign Investment'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13491