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Exporting versus Foreign Direct Investment


  • Donnenfeld, Shabtai

    () (York University)

  • Weber, Shlomo

    (Southern Methodist University)


In this paper we investigate how strategic aspects influence the choice between exporting and servicing foreign markets by setting up a plant in the foreign country. We show that tariffs on imports in conjunction with the size of the set up costs incurred while setting up plants and the size of the foreign market will determine whether domestic firms which face competition from a foreign firm will choose to deter foreign direct investment (FDI), prevent exports or may accommodate either form of penetration of a foreign firm in their market. Our analysis reveals that there is no simple relationship between the size of the tariff and the propensity of foreign firms to engage in foreign direct investment. Higher tariffs may result in exports rather than FDI. Furthermore, due to actual competition among domestic firms while facing potential competition in the form of FDI, a rise in tariffs may lead to a decrease in domestic output.

Suggested Citation

  • Donnenfeld, Shabtai & Weber, Shlomo, 2000. "Exporting versus Foreign Direct Investment," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 15, pages 100-126.
  • Handle: RePEc:ris:integr:0126

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    References listed on IDEAS

    1. Elhanan Helpman, 1995. "Politics and Trade Policy," NBER Working Papers 5309, National Bureau of Economic Research, Inc.
    2. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-850, September.
    3. Schweinberger, Albert G & Vosgerau, Hans J, 1997. "Foreign Factor Ownership and Optimal Tariffs," Review of International Economics, Wiley Blackwell, vol. 5(1), pages 1-19, February.
    4. Hillman, Arye L, 1982. "Declining Industries and Political-Support Protectionist Motives," American Economic Review, American Economic Association, vol. 72(5), pages 1180-1187, December.
    5. Horstmann, Ignatius J. & Markusen, James R., 1992. "Endogenous market structures in international trade (natura facit saltum)," Journal of International Economics, Elsevier, vol. 32(1-2), pages 109-129, February.
    6. Ellingsen, Tore & Warneryd, Karl, 1999. "Foreign Direct Investment and the Political Economy of Protection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 357-379, May.
    7. Hillman, Arye L & Ursprung, Heinrich W, 1993. "Multinational Firms, Political Competition, and International Trade Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 347-363, May.
    8. Hillman, Arye L. & Ursprung, Heinrich W., 1996. "The political economy of trade liberalization in the transition," European Economic Review, Elsevier, vol. 40(3-5), pages 783-794, April.
    9. Grether, Jean-Marie & de Melo, Jaime & Olarreaga, Marcelo, 2001. "Who determines Mexican trade policy?," Journal of Development Economics, Elsevier, vol. 64(2), pages 343-370, April.
    10. Konishi, Hideo & Saggi, Kamal & Weber, Shlomo, 1999. "Endogenous trade policy under foreign direct investment," Journal of International Economics, Elsevier, vol. 49(2), pages 289-308, December.
    11. Marcelo Olarreaga, 1998. "Tariff Reductions under Foreign Factor Ownership," Canadian Journal of Economics, Canadian Economics Association, vol. 31(4), pages 830-836, November.
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    Cited by:

    1. Akinkugbe, Oluyele, 2003. "Flow of Foreign Direct Investment to Hitherto Neglected Developing Countries," WIDER Working Paper Series 002, World Institute for Development Economic Research (UNU-WIDER).

    More about this item


    Foreign direct investment; Imperfect competition; Tariff jumping;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements


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