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FINET Report Summary

Project ID: 337272
Funded under: FP7-IDEAS-ERC
Country: France

Mid-Term Report Summary - FINET (Firm Networks Trade and Growth)

The general purpose of this ERC funded research is to introduce the notion of large-scale economic networks into the mainstream of economics, in particular in international economics. Three specific projects exemplify the variety of themes addressed in this ERC funded research.
In The Gravity Equation in International Trade, I propose an explanation for the so-called gravity equation, which states that international trade is proportional to country size, and inversely proportional to geographic distance. This explanation is based on the emergence of a stable network of linkages between importers and exporters worldwide. I show that if information about potential buyers (importers) and sellers (exporters) gradually percolates through a network of firm-to-firm linkages, i.e. if firms learn from each other over time, then aggregate trade flows between countries are proportional to country size, and inversely proportional to geographic distance.
In Migrants, Ancestors, and Foreign Investments, my co-authors Konrad Burchardi, Tarek Hassan and I show that the ethnic diversity brought about by international migrations strengthens economic ties, and fosters foreign direct investment. Using data on 130 years of historical migrations into the United States, we study the economic impact of the ethnic network that emerges from more than a century of migrations. Local firms in US counties with more descendants of foreign migrants are more likely to engage in foreign direct investments abroad, and local workers are more likely to find work at local subsidiaries of foreign multinationals. In contrast, we find no statistical causal effect of migrations on imports and exports.
In Trade, Merchants, and the Lost Cities of the Bronze Age, my co-authors Gojko Barjamovic, Kerem Cosar, Ali Hortacsu and I study tens of thousands of letters written by Assyrian merchants in the 19th Century BC, to extract information about economic exchanges among the trade network of Assyrian colony cities. To our own surprise, we find that the same statistical model, the so-called gravity equation in international trade, describes trade flows 4,000 years ago as well as it does today. We turn this model on its head, and use it to recover the geographic location of lost cities, i.e. cities we know existed in the Bronze Age, but which archaeologists have not yet located.

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