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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. Joshua Aizenman & Nancy Marion, 2001. "The Merits of Horizontal versus Vertical FDI in the Presence of Uncertainty," NBER Working Papers 8631, National Bureau of Economic Research, Inc.
  2. 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.
  3. Seiichi Katayama & Kaz Miyagiwa, 2007. "FDI as a Signal of Quality," Emory Economics 0706, Department of Economics, Emory University (Atlanta).
  4. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Scholarly Articles 3445092, Harvard University Department of Economics.
  5. Federico Etro, 2008. "Endogenous Market Structures and Strategic Trade Policy," Working Papers 149, University of Milano-Bicocca, Department of Economics, revised Dec 2008.
  6. Edward Schlee, 2008. "Expected consumer’s surplus as an approximate welfare measure," Economic Theory, Springer, vol. 34(1), pages 127-155, January.
  7. Sung, Hongmo & Lapan, Harvey E, 2000. "Strategic Foreign Direct Investment and Exchange-Rate Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(2), pages 411-23, May.
  8. Qiu, Larry D. & Zhou, Wen, 2006. "International mergers: Incentives and welfare," Journal of International Economics, Elsevier, vol. 68(1), pages 38-58, January.
  9. repec:tpr:qjecon:v:101:y:1986:i:4:p:805-33 is not listed on IDEAS
  10. Anthony Creane & Kaz Miyagiwa, 2005. "Information and Disclosure in Strategic Trade Policy," Emory Economics 0530, Department of Economics, Emory University (Atlanta).
  11. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
  12. Ignatius J. Horstmann & James R. Markusen, 1995. "Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise," NBER Working Papers 5029, National Bureau of Economic Research, Inc.
  13. Rafael Rob & Nikolaos Vettas, 2003. "Foreign Direct Investment and Exports with Growing Demand," PIER Working Paper Archive 03-001, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  14. Creane, Anthony, 2007. "Productivity information in vertical sharing agreements," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 821-841, August.
  15. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, June.
  16. repec:tpr:qjecon:v:98:y:1983:i:2:p:185-99 is not listed on IDEAS
  17. 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.
  18. 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.
  19. 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.
  20. 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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