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Trade Costs and Foreign Direct Investment

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Author Info
Neary, J Peter

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Abstract

This paper reviews the theory of foreign direct investment (FDI), focusing on an apparent conflict between theory and recent trends in the globalized world. The bulk of FDI is horizontal rather than vertical, but 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, which are quantitatively more important than greenfield FDI, are encouraged rather than discouraged by falling trade costs.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5933.

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Date of creation: Nov 2006
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Handle: RePEc:cpr:ceprdp:5933

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Related research
Keywords: cross-border mergers and acquisitions export platform FDI foreign direct investment international trade policy trade liberalisation

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Find related papers by JEL classification:
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Long, Ngo Van & Vousden, Neil, 1995. "The Effects of Trade Liberalization on Cost-Reducing Horizontal Mergers," Review of International Economics, Blackwell Publishing, vol. 3(2), pages 141-55, June.
  2. Neary, J Peter, 2004. "Cross-Border Mergers as Instruments of Comparative Advantage," CEPR Discussion Papers 4325, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Olivier Bertrand & Habib Zitouna, 2006. "Trade Liberalization and Industrial Restructuring: The Role of Cross-Border Mergers and Acquisitions," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 15(2), pages 479-515, 06. [Downloadable!] (restricted)
  5. Braconier, Henrik & Ekholm, Karolina, 2000. "Swedish Multinationals and Competition from High- and Low-Wage Locations," Review of International Economics, Blackwell Publishing, vol. 8(3), pages 448-61, August. [Downloadable!] (restricted)
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  6. Horn, Henrik & Persson, Lars, 1999. "The Equilibrium Ownership of an International Oligopoly," CEPR Discussion Papers 2302, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Keith Head & Thierry Mayer, 2004. "Market Potential and the Location of Japanese Investment in the European Union," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 959-972, 01. [Downloadable!] (restricted)
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  8. Ekholm, Karolina & Forslid, Rikard & Markusen, James R., 2003. "Export-Platform Foreign Direct Investment," CEPR Discussion Papers 3823, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Motta, Massimo & Norman, George, 1996. "Does Economic Integration Cause Foreign Direct Investment?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 757-83, November.
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  10. Volker Nocke & Stephen Yeaple, 2004. "Mergers and the Composition of International Commerce," NBER Working Papers 10405, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Grossman, Gene & Helpman, Elhanan & Szeidl, Adam, 2004. "Optimal Integration: Strategies for the Multinational Firm," CEPR Discussion Papers 4477, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Emily Blanchard, 2007. "Foreign Direct Investment, Endogenous Tariffs, and Preferential Trade Agreements," Advances in Economic Analysis & Policy, Berkeley Electronic Press, vol. 7(1), pages 1800-1800. [Downloadable!] (restricted)
  13. Bruce A. Blonigen & Ronald B. Davies & Glen R. Waddell & Helen T. Naughton, 2004. "FDI in Space: Spatial Autoregressive Relationships in Foreign Direct Investment," NBER Working Papers 10939, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jorn Kleinert & Farid Toubal, 2006. "Distance costs and Multinationals’ foreign activities," CEI Working Paper Series 2006-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  2. Michele Fratianni & Chang Hoon Oh, 2008. "Expanding RTAs, Trade Flows, and the Multinational Enterprise," Working Papers 2008-02, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
  3. Steven Brakman & Harry Garretsen & Charles van Marrewijk, 2006. "Cross-Border Mergers & Acquisitions: The Facts as a Guide for International Economics," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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