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Exporting versus Foreign Direct Investment

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Author Info

  • Donnenfeld, Shabtai

    ()
    (York University)

  • Weber, Shlomo

    (Southern Methodist University)

Abstract

In this paper we investigate how strategic aspects influence the choice between exporting and servicing foreign markets by setting up a plant in the foreign country. We show that tariffs on imports in conjunction with the size of the set up costs incurred while setting up plants and the size of the foreign market will determine whether domestic firms which face competition from a foreign firm will choose to deter foreign direct investment (FDI), prevent exports or may accommodate either form of penetration of a foreign firm in their market. Our analysis reveals that there is no simple relationship between the size of the tariff and the propensity of foreign firms to engage in foreign direct investment. Higher tariffs may result in exports rather than FDI. Furthermore, due to actual competition among domestic firms while facing potential competition in the form of FDI, a rise in tariffs may lead to a decrease in domestic output.

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Bibliographic Info

Article provided by Center for Economic Integration, Sejong University in its journal Journal of Economic Integration.

Volume (Year): 15 (2000)
Issue (Month): ()
Pages: 100-126

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Handle: RePEc:ris:integr:0126

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Web page: http://econo.sejong.ac.kr/
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Related research

Keywords: Foreign direct investment; Imperfect competition; Tariff jumping;

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Cited by:
  1. Akinkugbe, Oluyele, 2003. "Flow of Foreign Direct Investment to Hitherto Neglected Developing Countries," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).

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