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A model of demand, productivity and foreign location decision among Taiwanese firms

  • Aw, Bee Yan
  • Lee, Yi
Registered author(s):

    We develop a theoretical framework to examine the relative importance of firm demand and productivity in firm decisions to export and where to locate foreign direct investments. The model shows that the equilibrium firm decision depends on product technology, consumer preference for product quality, fixed investment costs of establishing a foreign subsidiary, transportation costs and relative wages. Our empirical results confirm the predictions of the theoretical model. Firm-level demand and productivity components are important in explaining the decision to participate in foreign markets with their relative importance depending on the firm's organizational form (exports versus FDI) and the destination of the investments. In general, FDI firms are more productive than exporting firms regardless of FDI destinations. FDI firms also have a higher demand component than exporters and this demand component is stronger than productivity. Finally, among FDI firms, while those with a high demand index and productivity have a significantly higher propensity to invest in high-income countries, firm productivity is the sole determinant of firms undertaking FDI in low-income countries.

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    Article provided by Elsevier in its journal Journal of International Economics.

    Volume (Year): 92 (2014)
    Issue (Month): 2 ()
    Pages: 304-316

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    Handle: RePEc:eee:inecon:v:92:y:2014:i:2:p:304-316
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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    1. Kalina Manova & Zhiwei Zhang, 2012. "Export Prices Across Firms and Destinations," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 379-436.
    2. Amit Khandelwal, 2009. "The Long and Short (of) Quality Ladders," NBER Working Papers 15178, National Bureau of Economic Research, Inc.
    3. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
    4. Alla Lileeva & Daniel Trefler, 2010. "Improved Access to Foreign Markets Raises Plant-level Productivity…For Some Plants," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 1051-1099.
    5. Maggie Xiaoyang Chen & Michael Owen Moore, 2009. "Location Decisions of Heterogeneous Multinational Firms," Working Papers 2009-17, The George Washington University, Institute for International Economic Policy.
    6. Aw, Bee Yan & Lee, Yi, 2008. "Firm heterogeneity and location choice of Taiwanese multinationals," Journal of International Economics, Elsevier, vol. 76(2), pages 403-415, December.
    7. Pablo Fajgelbaum & Gene Grossman & Elhanan Helpman, 2013. "A Linder Hypothesis for Foreign Direct Investment," Working Paper 28443, Harvard University OpenScholar.
    8. Matthieu Crozet & Keith Head & Thierry Mayer, 2009. "Quality Sorting and Trade: Firm-Level Evidence for French Wine," Working Papers 2009-14, CEPII research center.
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    10. Paula Bustos, 2011. "Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms," American Economic Review, American Economic Association, vol. 101(1), pages 304-40, February.
    11. Aw, Bee Yan & Lee, Yi, 2008. "Firm heterogeneity and location choice of Taiwanese multinationals," Journal of International Economics, Elsevier, vol. 75(1), pages 167-179, May.
    12. Lucia Foster & John Haltiwanger & Chad Syverson, 2005. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," Working Papers 05-11, Center for Economic Studies, U.S. Census Bureau.
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    14. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    15. Mark J. Roberts & Daniel Yi Xu & Xiaoyan Fan & Shengxing Zhang, 2012. "A Structural Model of Demand, Cost, and Export Market Selection for Chinese Footwear Producers," NBER Working Papers 17725, National Bureau of Economic Research, Inc.
    16. Baldwin, Richard & Harrigan, James, 2007. "Zeros, Quality and Space: Trade Theory and Trade Evidence," CEPR Discussion Papers 6368, C.E.P.R. Discussion Papers.
    17. Eric A. Verhoogen, 2008. "Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 489-530.
    18. Jože P. Damijan & Črt Kostevc & Sašo Polanec, 2010. "From Innovation to Exporting or Vice Versa?," The World Economy, Wiley Blackwell, vol. 33(3), pages 374-398, 03.
    19. Bee Yan Aw & Mark J. Roberts & Daniel Yi Xu, 2011. "R&D Investment, Exporting, and Productivity Dynamics," American Economic Review, American Economic Association, vol. 101(4), pages 1312-44, June.
    20. Johnson, Robert C., 2012. "Trade and prices with heterogeneous firms," Journal of International Economics, Elsevier, vol. 86(1), pages 43-56.
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