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The Trade‐Off between Foreign Direct Investments and Exports: The Role of Multiple Dimensions of Distance

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  • Maureen Lankhuizen
  • Henri L. F. de Groot
  • Gert‐Jan M. Linders

Abstract

To serve foreign markets, firms can either export or set up a local subsidiary through horizontal Foreign Direct Investment (FDI). The conventional proximity-concentration theory suggests that FDI substitutes for trade if distance between countries is large, while exports become more important if scale economies in production are large. This paper investigates empirically the effect of different dimensions of distance on the choice between exports and FDI. We find that different dimensions of distance affect exports and FDI differently. There is clear evidence of a proximity-concentration trade-off in geographical terms: the share of FDI sales in total foreign sales (exports and FDI sales) increases with geographical distance. The positive relation between import tariffs and FDI intensity provides further evidence for a trade-off resulting from trade costs. On the other hand, the share of FDI decreases with language differences and cultural and institutional barriers. The latter dimensions of distance thus affect FDI more strongly than exports.
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  • Maureen Lankhuizen & Henri L. F. de Groot & Gert‐Jan M. Linders, 2011. "The Trade‐Off between Foreign Direct Investments and Exports: The Role of Multiple Dimensions of Distance," The World Economy, Wiley Blackwell, vol. 34(8), pages 1395-1416, August.
    • Handle: RePEc:bla:worlde:v:34:y:2011:i:8:p:1395-1416
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    2. Ichiro Iwasaki & Keiko Suganuma, 2015. "The impact of FDI and socio-cultural similarity on international trade: Poisson pseudo-maximum likelihood estimation of a Russian trade model," Economics Bulletin, AccessEcon, vol. 35(2), pages 1020-1033.
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    4. Roberta Capello & Andrea Caragliu, 2018. "Proximities and the Intensity of Scientific Relations," International Regional Science Review, , vol. 41(1), pages 7-44, January.
    5. Pedro Sánchez-Sellero & Jorge Rosell-Martínez & José Manuel García-Vázquez, 2014. "Spillovers from Foreign Direct Investment in Spanish Manufacturing Firms," Review of International Economics, Wiley Blackwell, vol. 22(2), pages 342-351, May.
    6. Maria Chiara Di Guardo & Emanuela Marrocu & Raffaele Paci, 2016. "The Concurrent Impact of Cultural, Political, and Spatial Distances on International Mergers and Acquisitions," The World Economy, Wiley Blackwell, vol. 39(6), pages 824-852, June.
    7. Zhang Lin & Xu Zheqian, 2017. "How Do Cultural and Institutional Distance Affect China’s OFDI towards the OBOR Countries?," TalTech Journal of European Studies, Sciendo, vol. 7(1), pages 24-42, June.
    8. Liu, Zhiyuan & Xu, Yue & Wang, Peijie & Akamavi, Raphaël, 2016. "A pendulum gravity model of outward FDI and export," International Business Review, Elsevier, vol. 25(6), pages 1356-1371.
    9. Wan, Jun & Baylis, Kathy & Mulder, Peter, 2015. "Trade-facilitated technology spillovers in energy productivity convergence processes across EU countries," Energy Economics, Elsevier, vol. 48(C), pages 253-264.
    10. Mariam Camarero & Laura Montolio & Cecilio Tamarit, 2019. "Determinants of German outward FDI: variable selection using Bayesian statistical," Working Papers 1906, Department of Applied Economics II, Universidad de Valencia.
    11. Qiyue Zhang & Zheng Wang & Godwin Okafor, 2022. "Understanding China’s Economic Engagement in Africa: An Exploration of the FDI-Trade Nexus," Sustainability, MDPI, vol. 14(23), pages 1-19, November.
    12. M. Del Gatto & C.S. Mastinu, 2016. "Sequentiality and Distance(s) in Cross-Border Mergers and Acquisitions: Evidence from Micro Data," Working Paper CRENoS 201616, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    13. Maureen B. M. Lankhuizen & Thomas De Graaff & Henri L. F. de Groot, 2015. "Product Heterogeneity, Intangible Barriers and Distance Decay: The Effect of Multiple Dimensions of Distance on Trade across Different Product Categories," Spatial Economic Analysis, Taylor & Francis Journals, vol. 10(2), pages 137-159, June.
    14. Xinran Liu, 2019. "Effects of Multiple Dimensions of Intangible Distance on Agro-food Exports: Evidence from China," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(12), pages 1-75, December.
    15. Klein, Michael A., 2023. "Trade secret protection, multinational firms and international trade," International Economics, Elsevier, vol. 173(C), pages 325-342.
    16. Iwasaki, Ichiro & Suganuma, Keiko, 2013. "A Gravity Model of Russian Trade: The Role of Foreign Direct Investment and Socio-Cultural Similarity," RRC Working Paper Series 40, Russian Research Center, Institute of Economic Research, Hitotsubashi University.
    17. Visser, Robin, 2019. "The effect of the internet on the margins of trade," Information Economics and Policy, Elsevier, vol. 46(C), pages 41-54.
    18. Andrea Caragliu & Chiara Del Bo & Henri Groot & Gert-Jan Linders, 2013. "Cultural determinants of migration," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 51(1), pages 7-32, August.
    19. Maureen Lankhuizen & Thomas De Graaff & Henri De Groot, 2012. "Product Heterogeneity, Intangible Barriers & Distance Decay: The effect of multiple dimensions of distance on trade across different product categories," ERSA conference papers ersa12p151, European Regional Science Association.
    20. Klein, Michael A, 2020. "Trade Secret Protection in a Developing Economy," MPRA Paper 103360, University Library of Munich, Germany.
    21. Camarero, Mariam & Montolio, Laura & Tamarit, Cecilio, 2019. "What drives German foreign direct investment? New evidence using Bayesian statistical techniques," Economic Modelling, Elsevier, vol. 83(C), pages 326-345.
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    23. Haoyuan Ding & Kees G. Koedijk & Chang Li & Tong Qi, 2021. "The internationalisation of Chinese firms: Impact of FDI experience on export performance," The World Economy, Wiley Blackwell, vol. 44(12), pages 3609-3640, December.

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    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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