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Export-Platform Foreign Direct Investment

In: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models

Author

Listed:
  • Karolina Ekholm
  • Rikard Forslid
  • James R. Markusen

Abstract

A poorly understood empirical phenomenon is export-platform affiliate production (EP), particularly for sale in third countries rather than in the parent or host countries. We develop a three-region model, with two identical large, high-cost countries (collectively called North) and a small, low-cost country (South). The large countries each have one firm. Our theory section analyzes the conditions under which one or both of these firms uses the South to produce for (a) export back to the parent (home-country EP), (b) export to the other large country (third-country EP), or (c) export to both (global EP). A free-trade area between one of the northern countries and South can lead to the insider northern firm choosing home or global EP and the outsider firm choosing third-country EP for a range of parameter values. Our empirical section shows the relevance of this outcome. Foreign manufacturing affiliates of US multinationals inside North America concentrate on home-country EP while affiliates inside Europe concentrate on third-country EP.

Suggested Citation

  • Karolina Ekholm & Rikard Forslid & James R. Markusen, 2021. "Export-Platform Foreign Direct Investment," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 6, pages 111-130, World Scientific Publishing Co. Pte. Ltd..
  • Handle: RePEc:wsi:wschap:9789811222962_0006
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    References listed on IDEAS

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    1. David L. Carr & James R. Markusen & Keith E. Maskus, 2021. "Estimating The Knowledge-Capital Model of the Multinational Enterprise," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 5, pages 95-110, World Scientific Publishing Co. Pte. Ltd..
    2. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, December.
    3. Bruce A. Blonigen, 2019. "In Search of Substitution Between Foreign Production and Exports," World Scientific Book Chapters, in: Foreign Direct Investment, chapter 9, pages 293-323, World Scientific Publishing Co. Pte. Ltd..
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    More about this item

    Keywords

    Multinational Firms; Horizontal Multinationals; Vertical Multinationals; Internalization; Vertical Integration; Outsourcing; Foreign Affiliates; Per-Capita Income; Non-homothetic Preferences; Income Elasticity of Demand; Missing Trade Puzzle; Skill Premium Puzzle; Pro-competitive Gains From Trade; Complements; Externalities;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F00 - International Economics - - General - - - General
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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