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Foreign Direct Investment in Producer Services: Theory and Empirical Evidence

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  • Horst Raff
  • Marc von der Ruhr

Abstract

This paper examines the pattern of foreign direct investment (FDI) in producer services. Specifically we construct a model to explain the stylized fact that producer-service FDI tends to follow FDI by downstream industries. Our point is that this may be the result of informational barriers to entry into foreign markets. The preconditions of the model are shown to be consistent with panel data on U.S. FDI in 25 host countries from 1976 to 1995.

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Bibliographic Info

Article provided by Duncker & Humblot, Berlin in its journal Applied Economics Quarterly.

Volume (Year): 53 (2007)
Issue (Month): 3 ()
Pages: 299-321

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Handle: RePEc:aeq:aeqaeq:v53_y2007_i3_q3_p299-321

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Keywords: foreign direct investment; producer services; multinational enterprises;

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References

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  1. Markusen, James R. & Venables, Anthony J., 1999. "Foreign direct investment as a catalyst for industrial development," European Economic Review, Elsevier, vol. 43(2), pages 335-356, February.
  2. Joseph Farrell, 1985. "Moral Hazard as an Entry Barrier," Working papers 387, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Keith Head & John Ries & Deborah Swenson, 1994. "Agglomeration Benefits and Location Choice: Evidence from Japanese Manufacturing Investment in the United States," NBER Working Papers 4767, National Bureau of Economic Research, Inc.
  4. Kyoji Fukao & Keiko Ito, 2003. "Foreign Direct Investment and Services Trade: The Case of Japan," NBER Chapters, in: Trade in Services in the Asia Pacific Region, NBER East Asia Seminar on Economics (EASE), Volume 11, pages 429-480 National Bureau of Economic Research, Inc.
  5. Joseph F. Francois, 1990. "Trade in Producer Services and Returns Due to Specialization under Monopolistic Competition," Canadian Journal of Economics, Canadian Economics Association, vol. 23(1), pages 109-24, February.
  6. Vern Terpstra & Chwo-Ming Yu, 1988. "Determinants of Foreign Investment of U.S. Advertising Agencies," Journal of International Business Studies, Palgrave Macmillan, vol. 19(1), pages 33-46, March.
  7. Kyle Bagwell, 1986. "Informational Product Differentiation as a Barrier to Entry," Discussion Papers 711, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Schmalensee, Richard., 1980. "Product differentiation advantages of pioneering brands," Working papers 1140-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  9. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
  10. Savin, N Eugene & White, Kenneth J, 1978. "Testing for Autocorrelation with Missing Observations," Econometrica, Econometric Society, vol. 46(1), pages 59-67, January.
  11. Ethier, Wilfred J, 1986. "The Multinational Firm," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 805-33, November.
  12. Francois, Joseph F, 1990. "Producer Services, Scale, and the Division of Labor," Oxford Economic Papers, Oxford University Press, vol. 42(4), pages 715-29, October.
  13. Kyle Bagwell, 1990. "Optimal Export Policy for a New-Product Monopoly," Discussion Papers 898, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  14. Horstmann, Ignatius J & Markusen, James R, 1987. "Strategic Investments and the Development of Multinationals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 109-21, February.
  15. Raff, Horst & Kim, Young-Han, 1999. "Optimal export policy in the presence of informational barriers to entry and imperfect competition," Journal of International Economics, Elsevier, vol. 49(1), pages 99-123, October.
  16. Markusen, James R, 1989. "Trade in Producer Services and in Other Specialized Intermediate Inputs," American Economic Review, American Economic Association, vol. 79(1), pages 85-95, March.
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Cited by:
  1. Kelle, Markus & Kleinert, Jörn & Raff, Horst & Toubal, Farid, 2012. "Cross-Border and Foreign-Affiliate Sales of Services: Evidence From German Micro-Data," CEPR Discussion Papers 9016, C.E.P.R. Discussion Papers.
  2. Jota Ishikawa & Hodaka Morita & Hiroshi Mukunoki, 2010. "FDI in Post-Production Services and Product Market Competition," Global COE Hi-Stat Discussion Paper Series gd10-136, Institute of Economic Research, Hitotsubashi University.
  3. Van Long, Ngo & Riezman, Raymond & Soubeyran, Antoine, 2005. "Fragmentation and services," The North American Journal of Economics and Finance, Elsevier, vol. 16(1), pages 137-152, March.
  4. repec:mrq:igeawp:0501 is not listed on IDEAS
  5. Joseph Daniels & Walid Hejazi & Marc von der Ruhr, 2005. "Regional vs. Global Financing Strategies for U.S. MNEs," Working Papers and Research 0511, Marquette University, Center for Global and Economic Studies and Department of Economics.
  6. John P. Weche Geluebcke, 2011. "Foreign Ownership and Firm Performance in German Services: First Evidence based on Official Statistics," Working Paper Series in Economics 213, University of Lüneburg, Institute of Economics.
  7. Ngo Van Long & Ray Riezman & Antoine Soubeyran, 2001. "Fragmentation, Outsourcing and the Service Sector," CIRANO Working Papers 2001s-43, CIRANO.

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