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Export versus FDI

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  • Helpman, Elhanan
  • Melitz, Marc J
  • Yeaple, Stephen R

Abstract

This Paper builds a multi-country, multi-sector general equilibrium model that explains the decision of heterogeneous firms to serve foreign markets either through exports or local subsidiary sales (FDI). These modes of market access involve different relative costs, some of which are sunk while others vary with sales volume (such as transport costs and tariffs). Relative to investment in a subsidiary, exporting involves lower sunk costs but higher per-unit costs. In equilibrium, only the more productive firms choose to serve the foreign markets and the most productive among this group will further choose to serve the overseas market via FDI. The Paper then explores several implications of the individual firms’ decisions for aggregate export and FDI sales relative to the domestic and foreign market sizes. In particular, it is shown that firm level heterogeneity is an important determinant of relative export and FDI flows. We use the model to derive testable empirical predictions on the relative aggregate export and FDI sales in a given country for a given sector based both on relative costs and the extent of firm level heterogeneity in that sector. These predictions are tested on data of US affiliate sales and US exports in 38 different countries and 52 sectors. The comparative statics based on relative costs are very similar to those tested by Brainard (AER 1997) and are confirmed in our data: sector/country specific transport costs and tariffs have a strong negative effect on export sales relative to FDI. More importantly, our new predictions for the effects of firm-level heterogeneity on the relative export and FDI sales are also strongly supported by the data: more heterogeneity leads to significantly more FDI sales relative to export sales.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3741.

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Date of creation: Feb 2003
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Handle: RePEc:cpr:ceprdp:3741

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Keywords: fdi; size distribution; trade;

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References

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  1. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(3), pages 451-71, June.
  2. Sourafel Girma & Steve Thompson & Peter W. Wright, 2002. "Why are Productivity and Wages Higher in Foreign Firms?," The Economic and Social Review, Economic and Social Studies, Economic and Social Studies, vol. 33(1), pages 93-100.
  3. Ethier, W.J. & Markusen, J.R., 1993. "Multinational Firms, Technology Diffusion and Trade," ISER Discussion Paper 0303, Institute of Social and Economic Research, Osaka University.
  4. Helpman, Elhanan, 1985. "Multinational Corporations and Trade Structure," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(3), pages 443-57, July.
  5. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, December.
  6. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  7. 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.
  8. Rafael Rob & Nikolaos Vettas, 2003. "Foreign Direct Investment and Exports with Growing Demand," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(3), pages 629-648, 07.
  9. Budd, John W & Konings, Jozef & Slaughter, Matthew, 2002. "International Rent Sharing in Multinational Firms," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3326, C.E.P.R. Discussion Papers.
  10. Ethier, Wilfred J, 1986. "The Multinational Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(4), pages 805-33, November.
  11. S. Lael Brainard, 1993. "A Simple Theory of Multinational Corporations and Trade with a Trade-Off Between Proximity and Concentration," NBER Working Papers 4269, National Bureau of Economic Research, Inc.
  12. Ignatius J. Horstmann & James R. Markusen, 1990. "Endogenous Market Structures in International Trade," NBER Working Papers 3283, National Bureau of Economic Research, Inc.
  13. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, vol. 87(4), pages 520-44, September.
  14. Mark E. Doms & J . Bradford Jensen, 1998. "Comparing Wages, Skills, and Productivity between Domestically and Foreign-Owned Manufacturing Establishments in the United States," NBER Chapters, in: Geography and Ownership as Bases for Economic Accounting, pages 235-258 National Bureau of Economic Research, Inc.
  15. Ignatius Horstmann & James R. Markusen, 1987. "Licensing versus Direct Investment: A Model of Internalization by the Multinational Enterprise," Canadian Journal of Economics, Canadian Economics Association, vol. 20(3), pages 464-81, August.
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