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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


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