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Familiarity Breeds Investment: Migrant Networks and Cross-Border Capital
Unformatted Document Text:  17 Destination countries with higher values on this index have better and more transparent political institutions. We use three measures to account for international institutional constraints. We include a dichotomous measure that is coded 1 if both countries i and j are members of the World Trade Organization. We measure membership in preferential trade agreements in two ways. First, we include a variable indicating that both the source and destination have a bilateral PTA. Second, in an effort to see if credibility can be imported from other countries, we include a measure of the total number of PTAs that the destination country has, less a PTA with the source country. Finally we include the logged value (in US dollars) of bilateral trade between the source and destination countries. Inclusion of this variable serves several purposes. First, pre-existing trading between the source and destination is an indicator of a level of information flow between the two countries; something we claim is captured by the measure of migrant networks. Second, the measures of preferential trade agreements and membership in the World Trade Organization could simply be proxying for bilateral trade. Explicitly including trade means that the aforementioned institutional measures will more accurately capture institutional solutions to the credibility problem. Finally, the inclusion of bilateral trade allows us to see how three factors—trade, investment and migrants—are related to one another. We estimate the effect of migrant networks on bilateral investment for the year 2002. To decrease the potential for reverse causality all independent variables are lagged one year with the exception of governance which is lagged two years as the World Bank did not compile it for 2001. Because the dependent variable (and most of the independent variables) corresponds to country pairs—source to destination—we report robust standard errors.

Authors: Leblang, David.
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17
Destination countries with higher values on this index have better and more transparent
political institutions.
We use three measures to account for international institutional constraints. We include a
dichotomous measure that is coded 1 if both countries i and j are members of the World Trade
Organization. We measure membership in preferential trade agreements in two ways. First,
we include a variable indicating that both the source and destination have a bilateral PTA.
Second, in an effort to see if credibility can be imported from other countries, we include a
measure of the total number of PTAs that the destination country has, less a PTA with the
source country.
Finally we include the logged value (in US dollars) of bilateral trade between the source and
destination countries. Inclusion of this variable serves several purposes. First, pre-existing
trading between the source and destination is an indicator of a level of information flow
between the two countries; something we claim is captured by the measure of migrant
networks. Second, the measures of preferential trade agreements and membership in the
World Trade Organization could simply be proxying for bilateral trade. Explicitly including
trade means that the aforementioned institutional measures will more accurately capture
institutional solutions to the credibility problem. Finally, the inclusion of bilateral trade allows
us to see how three factors—trade, investment and migrants—are related to one another.
We estimate the effect of migrant networks on bilateral investment for the year 2002. To
decrease the potential for reverse causality all independent variables are lagged one year with
the exception of governance which is lagged two years as the World Bank did not compile it for
2001. Because the dependent variable (and most of the independent variables) corresponds to
country pairs—source to destination—we report robust standard errors.


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