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Familiarity Breeds Investment: Migrant Networks and Cross-Border Capital
Unformatted Document Text:  18 IV. Results Column 1 of table 1 contains results from estimating a gravity model of country j’s portfolio investment in country i for 2002. Variables used in other gravity-based models of portfolio investment enter with the expected sign and significance: investment is greater between economically larger countries and between countries that have a common colonial history, share a common official language, that peg their exchange rates to a common currency, that have signed a dual taxation treaty, and that have similar growth cycles. Countries with higher average levels of education--our measure of human capital--receive more portfolio investment while those with capital account restrictions receive less. Our results also reinforce the odd finding from prior research--that distance has a statistically significant and negative effect on bilateral portfolio investment. Recall that the standard ICAPM model would suggest a positive relationship as countries farther away from one another would be less likely to experience similar economic shocks. The negative finding, however, is consistent with earlier findings and may reflect what Portes, Rey and Oh (2001) refer to generically as “informational frictions.” 13 The indicators of domestic political commitments are also as expected: countries with credible domestic institutions (higher values of governance and the polity score) receive larger amounts of portfolio investment, a result that is consistent with aggregate studies of foreign investment (e.g., Alfaro, et al 2006; Jensen 2003) 14 . The results for international commitment mechanisms are mixed: membership in the WTO or having a bilateral PTA has no statistically 13 Coval and Moskowitz (1999) also find that distance has a negative effect on investment decisions as US investors and portfolio managers have a preference for geographically proximate investments because they have better information about them. In a study of stockholdings in Finland, Grinblatt and Keloharju (2001) find that distance-their proxy for dissimilarity in language and culture--influences portfolio choice. Hau (2001) reaches a similar conclusion with regard to German traders who consistently earn higher average returns when compared with foreign investors trading on the same exchange. 14 Adding these two variables separately does little to alter their parameter estimates and does not decrease their level of statistical significance.

Authors: Leblang, David.
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18
IV.
Results
Column 1 of table 1 contains results from estimating a gravity model of country j’s portfolio
investment in country i for 2002. Variables used in other gravity-based models of portfolio
investment enter with the expected sign and significance: investment is greater between
economically larger countries and between countries that have a common colonial history,
share a common official language, that peg their exchange rates to a common currency, that
have signed a dual taxation treaty, and that have similar growth cycles. Countries with higher
average levels of education--our measure of human capital--receive more portfolio investment
while those with capital account restrictions receive less.
Our results also reinforce the odd finding from prior research--that distance has a
statistically significant and negative effect on bilateral portfolio investment. Recall that the
standard ICAPM model would suggest a positive relationship as countries farther away from
one another would be less likely to experience similar economic shocks. The negative finding,
however, is consistent with earlier findings and may reflect what Portes, Rey and Oh (2001)
refer to generically as “informational frictions.”
13
The indicators of domestic political commitments are also as expected: countries with
credible domestic institutions (higher values of governance and the polity score) receive larger
amounts of portfolio investment, a result that is consistent with aggregate studies of foreign
investment (e.g., Alfaro, et al 2006; Jensen 2003)
14
. The results for international commitment
mechanisms are mixed: membership in the WTO or having a bilateral PTA has no statistically
13
Coval and Moskowitz (1999) also find that distance has a negative effect on investment decisions as US
investors and portfolio managers have a preference for geographically proximate investments because they have
better information about them. In a study of stockholdings in Finland, Grinblatt and Keloharju (2001) find that
distance-their proxy for dissimilarity in language and culture--influences portfolio choice. Hau (2001) reaches a
similar conclusion with regard to German traders who consistently earn higher average returns when compared
with foreign investors trading on the same exchange.
14
Adding these two variables separately does little to alter their parameter estimates and does not decrease their
level of statistical significance.


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