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Service innovation and the proximity-concentration trade-off model of trade and FDI

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  • Fulvio, Castellacci

Abstract

This paper introduces service innovation in the proximity-concentration trade-off model of trade and FDI (Helpman, Melitz and Yeaple, 2004). The idea is that innovation will have two main effects on service firms’ choice between exports and FDI. First, innovative firms will on average have higher productivity levels than non-innovative enterprises. Secondly, innovators will have to pay a higher relational distance cost for undertaking export activities, and they will therefore prefer to avoid (or reduce) these costs by choosing a FDI strategy instead. We test the empirical relevance of this idea on a new survey dataset for a representative sample of firms in all business service sectors in Norway. The results show that firms are more likely to choose FDI rather than export the greater their productivity level and the higher the relational distance costs they face.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 31002.

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Date of creation: 2011
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Handle: RePEc:pra:mprapa:31002

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Keywords: Service sectors; innovation; export; FDI; firm heterogeneity; survey data;

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  9. Castellacci, Fulvio, 2009. "How does competition affect the relationship between innovation and productivity? Estimation of a CDM model for Norway," MPRA Paper 27591, University Library of Munich, Germany.
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  14. Castellacci, Fulvio, 2008. "Technological paradigms, regimes and trajectories: Manufacturing and service industries in a new taxonomy of sectoral patterns of innovation," Research Policy, Elsevier, vol. 37(6-7), pages 978-994, July.
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  17. Castellacci, Fulvio, 2010. "Firm heterogeneity, international cooperations and export participation," MPRA Paper 27585, University Library of Munich, Germany.
  18. 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.
  19. Keith Head & John Ries, 2004. "Exporting and FDI as Alternative Strategies," Oxford Review of Economic Policy, Oxford University Press, vol. 20(3), pages 409-423, Autumn.
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  24. Yeaple, Stephen Ross, 2003. "The complex integration strategies of multinationals and cross country dependencies in the structure of foreign direct investment," Journal of International Economics, Elsevier, vol. 60(2), pages 293-314, August.
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