Endnotes

¹We follow the United Nations Conference on Trade and Development (UNCTAD) policies in categorizing Republic of Korea as part of developing Asia.

²Similarly, while we have not included all the EU members, the excluded countries are relatively marginal players in Asia.

³The theoretical basis for the gravity model of FDI has recently been proposed by Head and Ries (2008). The competing model is the capital-knowledge model of multinational activity developed by Carr, Markusen, and Maskus (CMM) (2001), which is arguably more appropriate if one uses FDI stock data. In addition, some of the variables required to operationalize the CMM model are not easily available for smaller developing Asian economies.

⁴However, if the foreign firm is looking to service the destination country's market, a longer distance also makes exporting from source countries more expensive and might therefore make local production more desirable and encourage investment. This argument is not unlike the tariff-jumping one.

⁵We could have included bilateral exports rather than imports. However, the nexus between FDI and trade is ambiguous a priori. Insofar as both are a means of servicing a market, they could be competitive in nature (i.e., market-seeking FDI). On the other hand, their relationship could be complementary if FDI is export-oriented, or if greater exports increase familiarity with a country, hence stimulating FDI inflows as well.

⁶We normalized the Chinn-Ito index from 0 to 100.

⁷An alternative suggested by Santos Silva and Tenreyo (2006) is to use the Poison pseudo maximum likelihood method. This methodology has been recently applied to FDI by Head and Ries (2008).

⁸The standard errors are corrected for heteroskedasticity and we use an estimated parameter of an exogenous variable (the inverse Mills' ratio) in the second stage. See di Giovanni (2005) for details.

⁹While not statistically significant, the net elasticity of distance from extra-regional sources is 0.056. Positive distance elasticity may have some economic basis. For instance, if the foreign firm is looking to service the destination country's market, a longer distance also makes exporting from source countries more expensive and might therefore make local production more desirable and thus, encourage investment.

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