This work was done under the aegis of the National Institute of Public Finance and Policy – Department of Economic Affairs Research Program. We thank Sourafel Girma and Stephen Tokarick for valuable discussions and the anonymous referee for substantive suggestions. Sayan Dasgupta provided able research assistance.
Version of Record online: 11 NOV 2011
© 2011 Blackwell Publishing Ltd
The World Economy
Special Issue: India
Volume 35, Issue 1, pages 61–78, January 2012
How to Cite
Bhattacharya, R., Patnaik, I. and Shah, A. (2012), Export Versus FDI in Services. World Economy, 35: 61–78. doi: 10.1111/j.1467-9701.2011.01385.x
- Issue online: 18 JAN 2012
- Version of Record online: 11 NOV 2011
In the Helpman et al. model (HMY), costs of transportation shape the decisions of firms about serving foreign customers by exporting or by doing FDI. The analysis of FDI in IT-related services presents a challenge given the low cost of transportation through telecom networks. This study extends the HMY model by considering uncertainty in product quality. This reverses the ordering of the firms that do FDI. These predictions are tested using Indian data in two industries: chemicals and software. Chemicals represents a conventional setting, and we find that the most productive firms invest abroad. However, in the case of the software industry, where there is uncertainty about product quality and the transportation cost is low, the results are consistent with the predictions of the extended model: less productive firms invest abroad.