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A Linder Hypothesis for FDI

  • Gene Grossman

    (Princeton University)

  • Elhanan Helpman

    (Harvard University)

  • Pablo Fajgelbaum

    (UCLA)

We study patterns of FDI in a multi-country world economy. First, we present evidence for a broad sample of countries that firms direct FDI disproportionately to markets with income levels similar to their home market. Then we develop a model featuring non-homothetic preferences for quality and monopolistic competition in which specialization is purely demand-driven and the decision to serve foreign countries via exports or FDI depends on a proximity-concentration trade-off. We characterize the joint patterns of trade and FDI when countries differ in income distribution and size and show that FDI is more likely to occur between countries with similar per capita income levels. The model predicts a Linder Hypothesis for FDI, consistent with the patterns found in the data.

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File URL: https://economicdynamics.org/meetpapers/2012/paper_351.pdf
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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 351.

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Date of creation: 2012
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Handle: RePEc:red:sed012:351
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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