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Trade costs and foreign direct investment

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  • Neary, J. Peter

Abstract

This paper focuses on an apparent conflict between the theory of foreign direct investment (FDI) and recent trends in the globalized world. The bulk of FDI is horizontal rather than vertical, and standard theory predicts that horizontal FDI is discouraged when trade costs fall. This seems to conflict with the experience of the 1990s, when trade liberalisation and technological change led to dramatic reductions in trade costs yet FDI grew much faster than trade. Two possible resolutions to this paradox are explored. First, horizontal FDI in trading blocs is encouraged by intra-bloc trade liberalisation, because foreign firms establish plants in one country as export platforms to serve the bloc as a whole. Second, cross-border mergers, quantitatively more important than greenfield FDI, are encouraged rather than discouraged by falling trade costs.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 18 (2009)
Issue (Month): 2 (March)
Pages: 207-218

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Handle: RePEc:eee:reveco:v:18:y:2009:i:2:p:207-218

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Web page: http://www.elsevier.com/locate/inca/620165

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Keywords: Cross-border mergers and acquisitions Export platform FDI Foreign direct investment International trade policy Trade liberalisation;

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