Factor Endowments, Economic Integration, Round-Tripping, and Inward FDI: Evidence from the Baltic Economies

Abstract

This paper studies the location choice of foreign multinational firms in the Baltic economies of Estonia, Latvia, and Lithuania using a knowledge-and-physical capital model across 2004–2017. We used the Bayesian model averaging estimation method to investigate a set of possible factors that drive inward FDI. Our analysis demonstrates that factor endowments play a dominant role in driving vertical foreign direct investment, while external market barriers generate “tariff-jumping” FDI. Our analysis quantifies the effects of round-trip FDI, European integration, and external bilateral free trade agreements vis-à-vis inward FDI in the Baltics.