f and g presume linearity in the parameter estimates on the explanatory variables and all
variables are transformed using a natural logarithm so that the parameter estimates have an
elasticity interpretation. Because the empirical model is a simultaneous system, the regressor-
error independence property is violated rendering traditional ordinary least-squares estimates
biased and inconsistent. Hence, the unknown structural parameters in our simultaneous equations
system are estimated using the full-information maximum liklihood (FIML) method with pooled,
cross-section (by FTAA country), time series data.
A priori, IR is expected to be inversely related to FDI since a higher U.S. interest rate
increases the debt capital cost for U.S. firms to invest abroad. ER is expected to be inversely
related to exports and directly related to FDI. Intuitively, this suggests that as the U.S. dollar
becomes stronger relative to foreign currencies, U.S. exports become more expensive to
importers, hence lowering U.S. exports. A strong dollar results in greater purchasing power
abroad and thus, makes FDI a more attractive market access alternative.
GDP is a proxy for foreign income and it is expected to be directly related to both exports
and FDI. Hence higher incomes are expected to lead to higher consumption of processed U.S.
food products regardless of distribution channel. Lower wages in the host country are expected
to attract FDI, thus, a negative relationship is expected.
Export prices (XPRICE) are expected to be inversely related to exports, indicating a
downward sloping demand curve for exports. And finally, the relationship between FDI and
exports for FTAA countries is difficult to predict a priori based on the mixed results in the
literature. If there is a direct relationship between the two variables, FDI and exports are
considered complementary, while an inverse relationship would indicate a substitute relationship.
Annual data were collected for selected FTAA countries—Canada, Mexico, and Brazil.
The data sources are U.S. Department of Agriculture, Foreign Agricultural Trade of the United