host countries rises by 10 percent. In fact, the extent of gravity in FDI is comparable to the extent of gravity in trade that has been found in the literature (see, for example, Head and Mayer, 2013).

Yeaple (2003a) extends earlier work by exploring an interaction between country and industry determinants of FDI and offers empirical support to both market access and comparative advantage motives. Specifically, he uses U.S. affiliate sales data in 39 countries and 50 manufacturing industries from the BEA Benchmark Survey of 1994 and finds that U.S. multinational firms from unskilledlabor intensive industries tend to invest in unskilled-labor abundant countries, a result consistent with the hypothesis that countries' factor endowment differences lead to vertical FDI. Unlike in Brainard (1997), the role of transportation cost is found to be negative and statistically insignificant, departing from the expected sign in the context of horizontal FDI.

Irarrazabal, Moxnes and Opromolla (2013) exploit the source of gravity in FDI by introducing intrafirm trade into the framework of Helpman, Melitz and Yeaple (2004) and generating gravity relationships for both exports and multinational production. The model rationalizes gravity in FDI by assuming that the headquarters produce a firm-specific tangible or intangible input that is required for production in any location and trade in such input is subject to trade costs including transportation costs or tariffs in the case of physical inputs and cultural and geographic remoteness from the headquarters in the case of headquarters services. The results suggest that intra-firm trade appears to play a crucial role in shaping the geography of multinational production; to justify the gravity observed, the affiliate's cost share related to input purchases from the headquarters must be about 90 percent. As suggested in the paper, this result may have captured other mechanisms that are dampening firms' multinational production as trade costs increase, such as imperfect transmission of technology between parents and affiliates either because of imperfect codifiability as discussed in Keller and Yeaple (2013) or because of higher frictions in the match between firms and workers.

Addressing the long-standing issue that FDI data are not systematically available across countries and over time, Ramondo, Rodriguez-Clare and Tintelnot (2015) present a comprehensive data set on the bilateral activity of multinational firms using UNCTAD data and an extrapolation procedure, with focus on two variables: affiliate revenues and the number of affiliates across country pairs. Among the various stylized facts, the analysis shows that the effects of distance on multinational production shares are similar to the ones found for trade shares (close to -1) and the extensive margin of multinational production is much more elastic to distance than the intensive margin.

While most empirical studies have examined FDI as bilateral relationships, an emerging literature accounts for the multi-country spatial interdependence of FDI flows predicted in Yeaple (2003b) and Ekholm, Forslid and Markusen (2007) as most multinational firms today employ complex integration strategies and operate multilateral production networks. Head and Mayer (2004) examine hypotheses of export-platform FDI and show that a country's market potential, measured by the distance-weighted sum of domestic and export market size, plays a significant role in countries' ability to attract multinational firms. The results show that Japanese multinationals are more likely to locate in regions proximate to large markets, suggesting that geographic proximity between host and third countries could also influence the investment decisions of multinational firms, especially those seeking to engage in export-platform FDI.

Spatial interdependence across FDI flows is also shown in Baltagi, Egger and Pfaffermayr (2007), Blonigen et al. (2007, 2008), and Chen (2011). Baltagi, Egger and Pfaffermayr (2007) estimate a 5