Export-Platform Investment with Proximity and Product Differentiation: Empirical Evidence from Port-Level International Trade

Multinational firms engage in foreign direct investments to minimize production costs and trade costs. In stead of making foreign direct investment, a firm may find optimal to produce in a periphery region of home country as an export-platform base to minimize these costs. With over 1,000 products categories of exports for six major Japanese ports, this paper empirically examines exports of sub-regions within a country in a gravity model. We obtained strong evidence that proximity of local ports to foreign market increases local-port exports even when destination is fixed to a single country. More importantly, we found that sensitivity of proximity of ports to foreign markets is more pronounced for an industry with higher Asia-intensity exports and a more product-differentiated industry. We can conclude from our empirical evidences that an industry with these characteristics sets up an export-platform base in peripheral regions of home country to minimize international trade costs.