Export versus FDI
This paper builds a multi-country, multi-sector general equilibrium model that explains the decision of heterogeneous firms to serve foreign markets either through exports or local subsidiary sales (FDI). These modes of market access involve different relative costs, some of which are sunk while others vary with sales volume (such as transport costs and tariffs). Relative to investment in a subsidiary, exporting involves lower sunk costs but higher per-unit costs. In equilibrium, only the more productive firms choose to serve the foreign markets and the most productive among this group will further choose to serve the overseas market via FDI. The paper then explores several implications of the individual firms' decisions for aggregate export and FDI sales relative to the domestic and foreign market sizes. In particular, it is shown that firm level heterogeneity is an important determinant of relative export and FDI flows. We use the model to derive testable empirical predictions on the relative aggregate export and FDI sales in a given country for a given sector based both on relative costs and the extent of firm level heterogeneity in that sector. These predictions are tested on data of US affiliate sales and US exports in 38 different countries and 52 sectors. The comparative statics based on relative costs are very similar to those tested by Brainard (AER 1997) and are confirmed in our data: sector/country specific transport costs and tariffs have a strong negative effect on export sales relative to FDI. More importantly, our new predictions for the effects of firm-level heterogeneity on the relative export and FDI sales are also strongly supported by the data: more heterogeneity leads to significantly more FDI sales relative to export sales.
|Date of creation:||Jan 2003|
|Publication status:||published as Helpman, Elhanan, Marc J. Melitz, and Stephen R. Yeaple. "Export Versus FDI with Heterogeneous Firms." American Economic Review 94, 1 (March 2004): 300-316|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- James R. Markusen, 2004.
"Multinational Firms and the Theory of International Trade,"
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262633078, January.
- Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
- Ethier, Wilfred J. & Markusen, James R., 1996.
"Multinational firms, technology diffusion and trade,"
Journal of International Economics,
Elsevier, vol. 41(1-2), pages 1-28, August.
- Wilfred J. Ethier & James R. Markusen, 1991. "Multinational Firms, Technology Diffusion and Trade," NBER Working Papers 3825, National Bureau of Economic Research, Inc.
- Ethier, W.J. & Markusen, J.R., 1993. "Multinational Firms, Technology Diffusion and Trade," ISER Discussion Paper 0303, Institute of Social and Economic Research, Osaka University.
- 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.
- Rafael Rob & Nikolaos Vettas, 2001. "Foreign Direct Investment and Exports with Growing Demand," Penn CARESS Working Papers f8c083d9257897f97ff49d054, Penn Economics Department.
- Rob, Rafael & Vettas, Nikolaos, 2001. "Foreign Direct Investment and Exports with Growing Demand," CEPR Discussion Papers 2786, C.E.P.R. Discussion Papers.
- 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.
- John W. Budd & Jozef Konings & Matthew J. Slaughter, "undated".
"International Rent Sharing in Multinational Firms,"
0202, Human Resources and Labor Studies, University of Minnesota (Twin Cities Campus).
- John W. Budd & Josef Konings & Matthew J. Slaughter, 2002. "International Rent Sharing in Multinational Firms," NBER Working Papers 8809, National Bureau of Economic Research, Inc.
- Budd, John W & Konings, Jozef & Slaughter, Matthew, 2002. "International Rent Sharing in Multinational Firms," CEPR Discussion Papers 3326, C.E.P.R. Discussion Papers.
- Mark E. Doms & J . Bradford Jensen, 1998. "Comparing Wages, Skills, and Productivity between Domestically and Foreign-Owned Manufacturing Establishments in the United States," NBER Chapters,in: Geography and Ownership as Bases for Economic Accounting, pages 235-258 National Bureau of Economic Research, Inc.
- 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.
- S. Lael Brainard, 1993. "A Simple Theory of Multinational Corporations and Trade with a Trade-Off Between Proximity and Concentration," NBER Working Papers 4269, National Bureau of Economic Research, Inc.
- Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, vol. 87(4), pages 520-544, September.
- Marc J. Melitz, 2003.
"The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity,"
Econometric Society, vol. 71(6), pages 1695-1725, November.
- Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
- Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
- Ignatius Horstmann & James R. Markusen, 1987. "Licensing versus Direct Investment: A Model of Internalization by the Multinational Enterprise," Canadian Journal of Economics, Canadian Economics Association, vol. 20(3), pages 464-481, August.
- Helpman, Elhanan, 1984.
"A Simple Theory of International Trade with Multinational Corporations,"
Journal of Political Economy,
University of Chicago Press, vol. 92(3), pages 451-471, June.
- Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Scholarly Articles 3445092, Harvard University Department of Economics.
- Sourafel Girma & Steve Thompson & Peter W. Wright, 2002. "Why are Productivity and Wages Higher in Foreign Firms?," The Economic and Social Review, Economic and Social Studies, vol. 33(1), pages 93-100.
- Wilfred J. Ethier, 1986. "The Multinational Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 805-833.
- Elhanan Helpman, 1985. "Multinational Corporations and Trade Structure," Review of Economic Studies, Oxford University Press, vol. 52(3), pages 443-457.
- Ignatius J. Horstmann & James R. Markusen, 1990. "Endogenous Market Structures in International Trade," NBER Working Papers 3283, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:9439. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.