Exporting Versus Foreign Direct Investment: Learning through Propinquity
AbstractWe examine a firm's choice between exporting and foreign direct investment (FDI) under demand and cost uncertainty. FDI enables the foreign firm to meet shifting local demand more quickly, increasing profit. However, FDI means using local inputs, so when the foreign firm competes with the local firm, FDI correlates their costs, which proves harmful. We show that FDI is chosen when demand uncertainty is greater than cost uncertainty, and when the firms produce less similar products. When FDI is chosen, the local firm is harmed and host country welfare usually declines. These conclusions hold both in price and quantity competition.
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Bibliographic InfoPaper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 1010.
Date of creation: Oct 2010
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