Migration, FDI and the margins of trade

We investigate the relationships between trade, migration and FDI in a unified framework. The relationships between trade and migration and between trade and FDI have been studied separately using standard gravity... [ view full abstract ]

We investigate the relationships between trade, migration and FDI in a unified framework. The relationships between trade and migration and between trade and FDI have been studied separately using standard gravity equations. In this paper, we acknowledge the interdependence between these two modes of foreign market access and present a model that characterizes firms' proximity concentration tradeoff as a function of migration networks. At a theoretical level, we decompose the effect of migration into its impact on the variable trade costs, the fixed cost to penetrate the foreign market, and the costs to set up a subsidiary abroad and derive the conditions under which migration induces an increase in the FDI-sales to trade ratio. At an empirical level, our identifcation strategy aims at controlling for a number of biases that arise from the interdependency between FDI and trade as well as for the well-known biases potentially arising from the omission of the extensive margin. Our results show that migration networks increase the FDI to trade ratio and that most of the effect comes from the intensive margin. The results are shown to be consistent with an interpretation in terms of information channel and to hold at the sectoral level.