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FDI versus Exports Substitutes or Complements? A Three Nations Model and Empirical Evidence

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Harald Oberhofer
Michael Pfaffermayr

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Abstract

There are two main options for companies to serve foreign markets; exports and foreign direct investment (FDI). Based on the Helpman, Melitz and Yeaple (2004) model for two host countries this paper derives a clear theoretical prediction for the decision between both strategies. A bivariate probit model is estimated using AMADEUS database to analyse the probability of using one or the other strategy. The empirical evidence indicates that a considerable number of companies use a combination of both strategies to serve foreign markets, which is in line with the analyzed three country model.

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Paper provided by FIW in its series FIW Working Paper series with number 012.

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Handle: RePEc:wsr:wpaper:y:2008:i:012

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Keywords: Exports; Foreing Direct Investment; Three Nations Model; Bivariate Probit Estimation;

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Find related papers by JEL classification:
C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies

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  1. James B. Davies & Matthias Sutter & Martin G. Kocher, 2005. "Economics research in Canada: A long-run assessment of journal publications," Papers on Strategic Interaction 2005-16, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
    Other versions:
  2. Markusen, James R. & Venables, Anthony J., 1996. "The Theory of Endowment, Intra-Industry and Multinational Trade," CEPR Discussion Papers 1341, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Michael Hanke & Jürgen Huber & Michael Kirchler & Matthias Sutter, 2007. "The economic consequences of a Tobin tax - An experimental analysis," Working Papers 2007-18, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
  4. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany. [Downloadable!]
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  5. Inmaculada Martínez-Zarzoso & Celestino Suárez-Burguet, 2005. "Transport costs and trade: Empirical evidence for Latin American imports from the European union," Journal of International Trade & Economic Development, Taylor and Francis Journals, vol. 14(3), pages 353-371, September. [Downloadable!] (restricted)
  6. Martin G. Kocher & Todd L. Cherry & Stephan Kroll & Robert J. Netzer & Matthias Sutter, 2007. "Conditional cooperation on three continents," Working Papers 2007-02, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
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  7. Sourafel Girma & Richard Kneller & Mauro Pisu, 2005. "Exports versus FDI: An Empirical Test," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 141(2), pages 193-218, July. [Downloadable!] (restricted)
  8. 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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  10. Head, Keith & Ries, John, 2003. "Heterogeneity and the FDI versus export decision of Japanese manufacturers," Journal of the Japanese and International Economies, Elsevier, vol. 17(4), pages 448-467, December. [Downloadable!] (restricted)
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  11. Jesus Crespo Cuaresma & Neil Foster & Johann Scharler, 2007. "Barriers to Technology Adoption, International R&D Spillovers and Growth," Working Papers 2007-09, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
  12. Rafael Rob & Nikolaos Vettas, 2003. "Foreign Direct Investment and Exports with Growing Demand," PIER Working Paper Archive 03-001, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
  13. Rafael Rob & Nikolaos Vettas, 2003. "Foreign Direct Investment and Exports with Growing Demand," Review of Economic Studies, Blackwell Publishing, vol. 70(3), pages 629-648, 07. [Downloadable!] (restricted)
  14. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
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  15. Richard Baldwin, 2005. "Heterogeneous Firms and Trade: Testable and Untestable Properties of the Melitz Model," NBER Working Papers 11471, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March. [Downloadable!]
  17. Horst, Thomas, 1971. "The Theory of the Multinational Firm: Optimal Behavior under Different Tariff and Tax Rates," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 1059-72, Sept.-Oct. [Downloadable!] (restricted)
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    Other versions:
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