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11 - Economic and financial integration and the rise of cross-border M&As
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- By S. Brakman, University of Groningen, Netherlands, G. Garita, Erasmus University Rotterdam, Netherlands, H. Garretsen, University of Groningen, Netherlands, C. Van Marrewijk, University of Utrecht, Netherlands
- Edited by Peter A. G. van Bergeijk, Steven Brakman, Rijksuniversiteit Groningen, The Netherlands
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- Book:
- The Gravity Model in International Trade
- Published online:
- 01 June 2011
- Print publication:
- 10 June 2010, pp 296-322
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- Chapter
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Summary
Introduction
Two waves stand out in the history of globalization. The first wave took place in between 1850–1913, and the second wave started after World War Two and continues until this day (see Bordo et al. 2003); moreover, Baldwin (2006) characterizes globalization in terms of two great unbundlings. In his view, during the first wave and much of the second, the fall in transportation costs and the removal of trade barriers spatially unbundled production from consumption, which enabled international specialization. With the second unbundling, the start of which Baldwin (2006) dates at around 1980–90, production itself is increasingly geographically separated; that is, it is no longer the case that production takes place under a single roof. In this light, new technologies enable firms to relocate certain stages of the production process to other countries.
As Figure 11.1 shows, throughout the past fifteen years the growth rate of FDI has surpassed those of both world GDP and world trade. This increased importance of FDI has led to an enthralling and relatively new research agenda that tries to explain the existence of multinational enterprises or MNEs (see for example Markusen 2002; Barba Navaretti and Venables 2004; Helpman 2006; and Brakman and Garretsen 2008). A key feature of these models is the role of trade barriers or, in general, economic distance in determining FDI, since distance-related variables are crucial for understanding FDI patterns.
1 - Introduction
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- By P. A. G. Van Bergeijk, Erasmus University, Netherlands, S. Brakman, University of Groningen, Netherlands
- Edited by Peter A. G. van Bergeijk, Steven Brakman, Rijksuniversiteit Groningen, The Netherlands
-
- Book:
- The Gravity Model in International Trade
- Published online:
- 01 June 2011
- Print publication:
- 10 June 2010, pp 1-26
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- Chapter
- Export citation
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Summary
Introduction
The gravity model describes one of the most stable relationships in economics: interaction between large economic clusters is stronger than between smaller ones, and nearby clusters attract each other more than far-off ones. This formulation of the model admittedly is vague. What is meant by large economic clusters, or “far-off”? In fact, this ambiguity reflects the success of the gravity model in economics. Although the model is probably best known in the context of international trade and capital flows between countries, it has also been successfully applied to describe how consumers flow between different shopping malls, patients between hospitals and much more. Also “distance” is a very broad concept. It might reflect actual distances in miles, as an approximation of transportation costs, but over the years more subtle elements of distance-related factors have been considered. Economic factors such as tariffs and non-tariff barriers have been included in applications of the gravity model, but also “non-economic” factors have been included, such as cultural differences, differences in religion, language (dis)similarities, the presence or absence of former colonial ties, institutional differences, differences in technological development, and so on.
The list of applications is long and, most remarkably, empirical tests show that this simple idea is very successful from an empirical point of view and is able to show that many economic phenomena between different locations can empirically be described by a gravity equation.