GEP Research Paper 00/19
Multinational Enterprises and New Trade Theory: Evidence for the Convergence Hypothesis
Salvador Barrios, Holger Görg and Eric Strobl
This paper was subsequently published in Open Economies Review, Vol.14, no.4, 2003, pp.397-418.
Abstract
According to the 'convergence hypothesis' multinational companies will tend to displace national firms and trade as total market size increases and as countries converge in relative size, factor endowments, and production costs. Using a recent model developed by Markusen and Venables (1998) as a theoretical framework, we explicitly develop empirical measures to proxy bilateral FDI between two countries and address their properties with regard to the convergence hypothesis. Using a panel of data of country pairs over the years 1985-96 we econometrically test for the relationship between convergence and bilateral FDI. Our results provide some empirical support for the convergence hypothesis.
Issued in December 2000.
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