st: Fixed Effects estimation with time-invariant variables

[Roman Wörner <h0953997@wu.ac.at>]

Dear all,

I am a doctoral student and rather new to STATA and statistics in 
general. I am thus struggling with a question I hope some of you are 
familiar with.

My dataset is an unbalanced panel with N=328 and T=8. I plan to used 
fixed effects models to control for differences between the firms in my 
sample. I am aware that with fixed effects models one cannot use 
time-invariant dependent variables. Nevertheless, I've read that it is 
possible to include time-invariant dependent variables when you interact 
them with another (time-variant) regressor.

Basically I have three variable of interest: two time-variant variables 
describing different firm strategies and a time-invariant variable 
describing the vertical scope (% of value chain steps of the industry 
the firm is active in; vertical scope takes on the values 0.2, 0.4, 0.6, 
0.8, and 1) of the firm. I argue that the relationship of the two 
strategy-variables depends on the vertical scope of the firm - for 
focused firms the two strategies are complements, while they are 
substitutes for firms with a broad scope.

I thus would run the following regression:

StrategyA = b0 + b1*StrategyB + b2*StrategyBXScope + Controls

I expect b1 to be positive and b2 to be negative. If that's the case I 
would interpret it that way, that an increase in the breadth of the 
scope reduces the complementarity between the two strategies (I would 
contrast combinations of StrategyA and StrategyB for different levels of 
Scope). I am wondering if this combination xtreg, fixed effects, 
time-variant and time-invariant variables are a valid design and allow 
for the conclusions I'd like to draw.

I am very grateful for all comments and recommendations.

Many thanks and best regards,

Roman

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