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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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Bibliographic Info

Article provided by Wiley Blackwell in its journal The World Economy.

Volume (Year): 34 (2011)
Issue (Month): 8 (08)
Pages: 1395-1416

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Handle: RePEc:bla:worlde:v:34:y:2011:i:8:p:1395-1416

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Cited by:
  1. Yang, Yong & Mallick, Sushanta, 2014. "Explaining cross-country differences in exporting performance: The role of country-level macroeconomic environment," International Business Review, Elsevier, vol. 23(1), pages 246-259.
  2. Andrea Caragliu & Chiara Del Bo & Henri Groot & Gert-Jan Linders, 2013. "Cultural determinants of migration," The Annals of Regional Science, Springer, vol. 51(1), pages 7-32, August.
  3. MC. Di Guardo & E. Marrocu & R. Paci, 2013. "The Concurrent Impact of Cultural, Political, and Spatial Distances on International Mergers and Acquisitions," Working Paper CRENoS 201308, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  4. Maureen B.M. Lankhuizen & Thomas de Graaff & Henri L.F. de Groot, 2012. "Product Heterogeneity, Intangible Barriers and Distance Decay: The Effect of Multiple Dimensions of Distance on Trade across Different Product Categories," Tinbergen Institute Discussion Papers 12-065/3, Tinbergen Institute.
  5. 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.

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