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Migration, FDI and the Margins of Trade

Author

Listed:
  • Maurice Kugler
  • Hillel Rapoport
Abstract
Standard neoclassical trade theory models trade, migration and FDI as substitutes in the sense that factor movements reduce the scope for trade and vice versa. This neglects the potential for migration to favor trade and FDI through a reduction in bilateral transaction costs, as emphasized by recent literature on migration and diaspora networks. This paper investigates the relationships between trade, migration and FDI in a context of firms' heterogeneity. We first present a model of exports and FDI-sales by heterogeneous firms where a (migration-induced) reduction in the fixed costs of setting up either an export or a production facility abroad results in an increase in trade (under certain conditions), FDI-sales and most importantly in the FDI-sales to trade ratio. We then test these predictions in a gravity framework using recent bilateral data on migration, trade and FDI. We find that migration – and especially skilled migration -- positively affects trade and FDI (at both the extensive and intensive margins), and more so for the latter, resulting in an increase in the FDI to trade ratio, as predicted by our model.

Suggested Citation

  • Maurice Kugler & Hillel Rapoport, 2011. "Migration, FDI and the Margins of Trade," CID Working Papers 222, Center for International Development at Harvard University.
    • Handle: RePEc:cid:wpfacu:222
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Immigration; Trade; FDI; firms' heterogeneity;
    All these keywords.

    JEL classification:

    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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