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Cost Heterogeneity and the Destination of Foreign Direct Investment

  • Seiichi Katayama

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

  • Sajal Lahiri

    (Department of Economics, Southern Illinois University, USA)

  • Eiichi Tomiura

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

This paper first of all develops a theoretical model to examine a number of heterogeneous firms' choice between making export-oriented foreign direct investments (FDI) in a host country and making FDI in another country to serve the market there. It is shown that all firms below a critical level of efficiency invest in the first country, and the other relatively more efficient firms invest in the second host country. The hypothesis is tested using firmlevel data on 118,300 Japanese firms covering the entire manufacturing sector. Multinomial logit estimates strongly support our theoretical findings.

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File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/dp166.pdf
File Function: First version, 2005
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Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number 166.

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Length: 25 pages
Date of creation: Jan 2005
Date of revision:
Handle: RePEc:kob:dpaper:166
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  1. Grossman, Gene & Helpman, Elhanan, 2002. "Outsourcing Versus FDI in Industry Equilibrium," CEPR Discussion Papers 3647, C.E.P.R. Discussion Papers.
  2. Volker Nocke & Stephen Yeaple, 2004. "An Assignment Theory of Foreign Direct Investment," NBER Working Papers 11003, National Bureau of Economic Research, Inc.
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  5. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  6. Zvi Griliches, 1998. "R&D and Productivity Growth: Comparing Japanese and U.S. Manufacturing Firms," NBER Chapters, in: R&D and Productivity: The Econometric Evidence, pages 187-210 National Bureau of Economic Research, Inc.
  7. repec:hrv:faseco:4784029 is not listed on IDEAS
  8. Head, Keith & Ries, John, 2003. "Heterogeneity and the FDI versus export decision of Japanese manufacturers," Journal of the Japanese and International Economies, Elsevier, vol. 17(4), pages 448-467, December.
  9. Tsai Pan-Long, 1999. "Regional Intergration, Foreign Investment, And Optimal Trade And Investment Policies," International Economic Journal, Taylor & Francis Journals, vol. 13(1), pages 1-18.
  10. Itagaki, Takao, 1979. "Theory of the Multinational Firm: An Analysis of Effects of Government Policies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 437-48, June.
  11. Antràs, Pol & Helpman, Elhanan, 2004. "Global Sourcing," CEPR Discussion Papers 4170, C.E.P.R. Discussion Papers.
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  13. Ethier, Wilfred J, 1986. "The Multinational Firm," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 805-33, November.
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  15. Lahiri, Sajal & Ono, Yoshiyasu, 1998. "Foreign Direct Investment, Local Content Requirement, and Profit Taxation," Economic Journal, Royal Economic Society, vol. 108(447), pages 444-57, March.
  16. Janeba,Eckhard, 1991. "Corporate income tax competition,Double taxation treaties, and foreign direct investment," Discussion Paper Serie A 361, University of Bonn, Germany.
  17. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Munich Reprints in Economics 20408, University of Munich, Department of Economics.
  18. Kravis, Irving B. & Lipsey, Robert E., 1982. "The location of overseas production and production for export by U.S. multinational firms," Journal of International Economics, Elsevier, vol. 12(3-4), pages 201-223, May.
  19. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August.
  20. Brander, James A. & Spencer, Barbara J., 1987. "Foreign direct investment with unemployment and endogenous taxes and tariffs," Journal of International Economics, Elsevier, vol. 22(3-4), pages 257-279, May.
  21. Tomiura, Eiichi, 2007. "Foreign outsourcing, exporting, and FDI: A productivity comparison at the firm level," Journal of International Economics, Elsevier, vol. 72(1), pages 113-127, May.
  22. Gene M. Grossman, 1983. "International Trade, Foreign Investment, and the Formation of the Entrepreneurial Class," NBER Working Papers 1174, National Bureau of Economic Research, Inc.
  23. David A. Riker & S. Lael Brainard, 1997. "U.S. Multinationals and Competition from Low Wage Countries," NBER Working Papers 5959, National Bureau of Economic Research, Inc.
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