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Exporting Versus Foreign Direct Investment: Learning through Propinquity

  • Anthony Creane
  • Kaz Miyagiwa

We examine a firm's choice between exporting and foreign direct investment (FDI) under demand and cost uncertainty. FDI enables the foreign firm to meet shifting local demand more quickly, increasing profit. However, FDI means using local inputs, so when the foreign firm competes with the local firm, FDI correlates their costs, which proves harmful. We show that FDI is chosen when demand uncertainty is greater than cost uncertainty, and when the firms produce less similar products. When FDI is chosen, the local firm is harmed and host country welfare usually declines. These conclusions hold both in price and quantity competition.

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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 1010.

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Date of creation: Oct 2010
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Handle: RePEc:emo:wp2003:1010
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  1. Anthony Creane & Kaz Miyagiwa, 2007. "Export, Foreign Direct Investment, and Joint Ventures: Learning the Rival's Costs through Propinquity," ISER Discussion Paper 0691, Institute of Social and Economic Research, Osaka University.
  2. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
  3. Aizenman, Joshua & Marion, Nancy, 2004. "The merits of horizontal versus vertical FDI in the presence of uncertainty," Journal of International Economics, Elsevier, vol. 62(1), pages 125-148, January.
  4. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
  5. Anthony Creane & Kaz Miyagiwa, 2005. "Information and Disclosure in Strategic Trade Policy," Emory Economics 0530, Department of Economics, Emory University (Atlanta).
  6. Bagwell, Kyle & Staiger, Robert W., 2003. "Informational aspects of foreign direct investment and the multinational firm," Japan and the World Economy, Elsevier, vol. 15(1), pages 1-20, January.
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  8. Seiichi Katayama & Kaz Miyagiwa, 2007. "FDI as a Signal of Quality," Emory Economics 0706, Department of Economics, Emory University (Atlanta).
  9. Horstmann, Ignatius J & Markusen, James R, 1996. "Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(1), pages 1-19, February.
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  11. Caves, Richard E, 1971. "International Corporations: The Industrial Economics of Foreign Investment," Economica, London School of Economics and Political Science, vol. 38(149), pages 1-27, February.
  12. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Scholarly Articles 3445092, Harvard University Department of Economics.
  13. Federico Etro, 2011. "Endogenous Market Structures And Strategic Trade Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 63-84, 02.
  14. Rafael Rob & Nikolaos Vettas, 2003. "Foreign Direct Investment and Exports with Growing Demand," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 629-648.
  15. Creane, Anthony, 2007. "Productivity information in vertical sharing agreements," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 821-841, August.
  16. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  17. Edward E Schlee, 2004. "Expected Consumer's Surplus as an Approximate Welfare Measure," Econometric Society 2004 North American Summer Meetings 97, Econometric Society.
  18. Sung, Hongmo & Lapan, Harvey E., 2000. "Strategic Foreign Direct Investment and Exchange Rate Uncertainty," Staff General Research Papers 1335, Iowa State University, Department of Economics.
  19. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  20. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 185-199.
  21. Xavier Vives, 1990. "Trade Association Disclosure Rules, Incentives to Share Information, and Welfare," RAND Journal of Economics, The RAND Corporation, vol. 21(3), pages 409-430, Autumn.
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