The impact of FDI and socio-cultural similarity on international trade: Poisson pseudo-maximum likelihood estimation of a Russian trade model

To empirically examine the impact of foreign direct investment and socio-cultural similarity on international trade between Russia and developed economies, we estimated a gravity model using panel data from Russia and 23 OECD member countries. To deal with the problem of Jensen's inequality, in which the expected value of the logarithm of a random variable is different from the logarithm of its expected value, we applied the Poisson pseudo-maximum likelihood estimator to our panel regression. The estimation results indicate that foreign direct investment and socio-cultural similarity are determining factors in the trade volume between Russia and these developed economies. We also found that the trade and investment activities of Russian firms differ considerably from their counterparts in developed economies.