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Transportation Cost and the Geography of Foreign Investment

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  • Laura Alfaro

    (Harvard Business School, Business, Government and the International Economy Unit)

  • Maggie X. Chen

    (George Washington University)

Abstract

Falling transportation costs and rapid technological progress in recent decades have precipitated an explosion of cross-border flows in goods, services, investments, and ideas led by multinational firms. Extensive research has sought to understand the geographic patterns of foreign direct investment (FDI). This chapter reviews existing theories and evidence specifically addressing questions including: How is FDI distributed across space? Why does the law of gravity apply? How do the costs of transporting goods, tasks, and technologies influence firms' decisions to separate tasks geographically and locate relative to one another? We discuss a variety of theoretical mechanisms through which transport cost and other geographic friction influence FDI and present the key empirical studies and findings.

Suggested Citation

  • Laura Alfaro & Maggie X. Chen, 2017. "Transportation Cost and the Geography of Foreign Investment," Harvard Business School Working Papers 17-061, Harvard Business School.
  • Handle: RePEc:hbs:wpaper:17-061
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    3. Charlie Joyez, 2017. "Network Structure of French Multinational Firms," Working Papers DT/2017/08, DIAL (Développement, Institutions et Mondialisation).
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    5. Ziran Ding, 2021. "Optimal Tariffs with Firm Heterogeneity, Variable Markups, and FDI," Bank of Lithuania Working Paper Series 99, Bank of Lithuania.
    6. Haoyun Meng & Peidong Deng & Jinbo Zhang, 2022. "Nonlinear Impact of Circulation-Industry Intelligentization on the Urban–Rural Income Gap: Evidence from China," Sustainability, MDPI, vol. 14(15), pages 1-26, August.
    7. Jarosław M. Nazarczuk & Stanisław Umiński & Tomasz Brodzicki, 2020. "Determinants of the spatial distribution of exporters in regions: the role of ownership," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 64(3), pages 547-574, June.

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