Daniels gratefully acknowledges support provided by Fulbright Canada, the Political Science Department at McMaster University, and Marquette University College of Business Administration's Miles Fund.
Transportation Costs and US Manufacturing FDI
Article first published online: 17 DEC 2013
© 2013 John Wiley & Sons Ltd
Review of International Economics
Volume 22, Issue 2, pages 299–309, May 2014
How to Cite
Daniels, J. P. and von der Ruhr, M. (2014), Transportation Costs and US Manufacturing FDI. Review of International Economics, 22: 299–309. doi: 10.1111/roie.12110
- Issue published online: 1 APR 2014
- Article first published online: 17 DEC 2013
- Fulbright Canada
- Political Science Department at McMaster University
- Marquette University College of Business Administration's Miles Fund
In empirical models of foreign direct investment (FDI), distance is most often used to proxy for transportation costs and other pure-trade costs. Given that distance is time invariant but transportation costs are not, this approach is less than satisfactory when actual transportation costs rise and fall over time.The contribution of this work is to explicitly control for transportation costs and thereby better understand their impact on FDI. We explore the impact of shipping costs on total US FDI stocks abroad, manufacturing stocks and service stocks using measures of sea-shipping and air-shipping costs in a Hausman–Taylor model that controls for endogeneity and allows for time-invariant variables such as distance. We find that transportation costs have a positive and statistically significant relationship with US total and manufacturing FDI, suggesting a substitute relationship between FDI and trade flows consistent with horizontal MNE activity. As one would expect, these costs are insignificant for service stocks.