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Familiarity Breeds Investment: Migrant Networks and Cross-Border Capital
Unformatted Document Text:  24 Our next hypothesis suggests that migrant networks facilitate cross-border investment through the provision of private information. Following Rauch and Trindade (2002) we argue that the informational role of migrant networks should be more important for trade in heterogeneous commodities; commodities where private information has greater value. As mentioned above, we believe that foreign direct investment opportunities are significantly more heterogeneous than portfolio investment opportunities. Not only are there an infinite number of FDI opportunities—ranging from joint ownership to greenfield investments—they also differ in that they are risky as the possibility of expropriation is higher. Portfolio investment, on the other hand, can only be made in assets that are publicly issued by either governmental or corporate interests; entities that provide relatively more information to markets. And because portfolio investment is more liquid, it can more easily be moved from market to market and from asset to asset, something that requires relatively less information than foreign direct investment. We therefore expect that migrant networks should be substantively more important for FDI than for portfolio investment. We examine this hypothesis in table 6 where we estimate a seemingly unrelated regression of the determinants of both portfolio investment and bilateral trade in commodities. Rather than report standard errors we provide bootstraped 95% confidence intervals which permits us to test the null hypothesis that the effect of migrant networks on portfolio investment is equal to its effect on trade in commodities. 21 Table 6 contains the results of this analysis. We find that larger migrant networks increase both portfolio investment and foreign direct investment but that the effect on FDI is substantively larger, and statistically different, from the effect on portfolio investment. In fact 21 Hypothesis testing using seemingly unrelated regression assumes that the errors from both equations are asymptotically normal. In the case of trade the residuals are not due to a large number of zeros. We therefore calculate standard errors and associated confidence intervals using bootstrap resampling with 50 replications. Varying the number of replications up to 500 only serves to increase the strength of our conclusions.

Authors: Leblang, David.
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24
Our next hypothesis suggests that migrant networks facilitate cross-border investment
through the provision of private information. Following Rauch and Trindade (2002) we argue
that the informational role of migrant networks should be more important for trade in
heterogeneous commodities; commodities where private information has greater value. As
mentioned above, we believe that foreign direct investment opportunities are significantly more
heterogeneous than portfolio investment opportunities. Not only are there an infinite number
of FDI opportunities—ranging from joint ownership to greenfield investments—they also
differ in that they are risky as the possibility of expropriation is higher. Portfolio investment,
on the other hand, can only be made in assets that are publicly issued by either governmental
or corporate interests; entities that provide relatively more information to markets. And
because portfolio investment is more liquid, it can more easily be moved from market to market
and from asset to asset, something that requires relatively less information than foreign direct
investment. We therefore expect that migrant networks should be substantively more
important for FDI than for portfolio investment.
We examine this hypothesis in table 6 where we estimate a seemingly unrelated regression
of the determinants of both portfolio investment and bilateral trade in commodities. Rather
than report standard errors we provide bootstraped 95% confidence intervals which permits us
to test the null hypothesis that the effect of migrant networks on portfolio investment is equal
to its effect on trade in commodities.
21
Table 6 contains the results of this analysis. We find that larger migrant networks increase
both portfolio investment and foreign direct investment but that the effect on FDI is
substantively larger, and statistically different, from the effect on portfolio investment. In fact
21
Hypothesis testing using seemingly unrelated regression assumes that the errors from both equations are
asymptotically normal. In the case of trade the residuals are not due to a large number of zeros. We therefore
calculate standard errors and associated confidence intervals using bootstrap resampling with 50 replications.
Varying the number of replications up to 500 only serves to increase the strength of our conclusions.


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