Economic topic Assignment Example | Topics and Well Written Essays - 1750 words

Economic topic - Assignment Example This paper, therefore, explains the empirical evidence on different roles played by the history and geography on the international finance and how they are inter-connected in improving the investors desires in the market. Over the recent years, geography has been seen as the growing interests of the international finance, particularly, on the studies of using the gravity models. The models were being used to determine the direction of the cross border financial flows and stocks. Using this approach, the bilateral trade in assets is deemed to increase depending with the size of the country and also decline with information asymmetries and transaction costs. This is because they are being captured by geographical distance and the variables relating to it (Portes and Rey, 2005). Furthermore, there has been a lot of empirical work on the gravity but has taken place without a theoretical foundation which can stand firm on the matter of financial holdings for cross-border. Anderson and van Wincoop (2003) gave an analysis that the estimated gravity equations which are not being founded in economic theory can result to biased estimations since some variables are omitted. It also leads to comparatives with an incorrect static analysis which doesn’t consider the general equilibrium effects of changing the cross border barriers. Different sources of literature such as Clemens and Williamson (2004) highlight the important trend and progress of the financial globalization since 1990s although it has not analyzed the historical forces which have influenced the international investment for a longer period of time. The existing literature also doesn’t highlight the applicability and generality over time of the emphasized factors on the standard framework. These shortcomings aroused the interests of writing this paper in order to be addressed accordingly. The paper gives a clear discussion on the issue by estimating the gravity model the international investment u sing an example of information on Us investors’ holdings. The history an effect is being tested through the past holdings influenced the current holdings (Eichengreen and Irwin, 1998). The aspect on how the past investment influences the current investment is through the fixed costs. The empirical evidence and literature theories have shown the permanent impacts on trade patterns as a result of mart penetration. This is due to the fixed costs incurred by firms when entering into the new market which they can’t get when exiting the same market (Dixit, 1989). The passing shocks of literatures can be cumulated to impact a more powerful still which can lead firms to penetrating the market and have the ability to learn more about the market in question thereby, have the advantage of having the initial information of the market. This helps many organizations to analyze the conditions of the current market with the information contained of the past before deciding on which st rategy to be used in penetrating the larger market. In simple terms, the historical theories and literature helps many companies to be prepares on the impacts as many firms have been penetrated in the past. As it is currently penetrating, hence, there