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Service characteristics and the choice between exports and FDI: Evidence from Belgian firms

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  • Leo Sleuwaegen
  • Peter M. Smith

Abstract

The decision to serve foreign markets through exports or foreign direct investment (FDI) has been studied within proximity-concentration models of location, mainly in the context of trade in goods. This paper goes beyond this approach to account for the specific nature of services that are traded across borders in relation to market transaction costs. We show how services can be characterized by a bundle of attributes that collectively describe the service. These attributes are then tested to show how they affect the choice between exports and FDI using service-level data for firms in Belgium selling services abroad. Three different types of characteristic are shown to affect the export versus FDI decision: intangibility, the search-experience-credence framework and the requirement for either the supplier or the client to physically move to the point of production. Among other determinants, we find general and hard to evaluate complex services to be exported more than locally produced in foreign markets. The opposite holds for specialized (customized) and ‘experience’ services, or services that need close interaction with the buyer in their delivery.

Suggested Citation

  • Leo Sleuwaegen & Peter M. Smith, 2021. "Service characteristics and the choice between exports and FDI: Evidence from Belgian firms," International Economics, CEPII research center, issue 168, pages 115-131.
    • Handle: RePEc:cii:cepiie:2021-q4-168-7
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    Cited by:

    1. Kyvik Nordås, Hildegunn, 2023. "Services in the India-EU Free Trade Agreement," Working Papers 2023:5, Örebro University, School of Business.
    2. Ivan Deseatnicov & Konstantin Kucheryavyy & Kyoji Fukao, . "Exports, trade costs and FDI entry: evidence from Japanese firms," UNCTAD Transnational Corporations Journal, United Nations Conference on Trade and Development.

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    More about this item

    Keywords

    Services; International trade; Exports; Foreign direct investment; Service characteristics;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L80 - Industrial Organization - - Industry Studies: Services - - - General

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