eThesis - School of Business electronic theses

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Objectives:

In this study the effects of immigration on Finnish bilateral import and export flows are studied using the gravity model of trade as a theoretical framework. Marginal effects of immigration on trade flows are found out by employing the traditional gravity equation partially and using data for 179 trading partners of Finland over a 17-year period 1995-2011. In addition, channels through which immigration could affect trade are discussed in this thesis and, finally, empirical estimation models employed in the estimation of the gravity equation are compared.

Theoretical background and methodology:

The theoretical framework of this study relates to the literature on business and social networks. The networks can bring about, for example, informational advantages or im-prove contract enforcement. In addition, immigration's impacts on imports could also be characterized by immigrants' preferences for their home goods. On the other hand, vast literature on theoretical gravity equation is reviewed in the thesis too. The theory on gravi-ty equation of trade is dealt with in detail to reflect the need for a correct theoretical equa-tion including multilateral trade resistance. Henceforth, in some of the empirical estima-tions the traditional gravity equation with amendments is employed to reflect the qualities revealed by the theory. Ultimately, the estimation of the partial gravity equation in this thesis is done by using both ordinary least squares (OLS) and Poisson pseudo-maximum-likelihood (PPML) methods to obtain information on an adequate estimator in the context of trade data, known to contain a large number of zeros and very likely to possess het-eroskedastic error terms.

Key findings:

Based on the results obtained in the empirical estimations, a small positive effect of immi-gration on imports and exports was found using the PPML and OLS regressions. When comparing the PPML and OLS estimators, the PPML was concluded to be more adequate in the context of this partial gravity equation. All in all, no conclusions could be drawn from the channels through which immigration might have an impact on trade due to in-complete model considerations. Thus further studies on immigration's effects on trade using a complete theory-based gravity equation and, especially, more complete data should be conducted in order to be able to draw further conclusions on the impact chan-nels of immigration on trade.