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FDI versus Exports: Multiple Host Countries and Empirical Evidence

Authors

  • Harald Oberhofer,

    1. Department of Economics and Social Sciences and Salzburg Centre of European Union Studies (SCEUS), University of Salzburg, Kapitelgasse, Salzburg
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  • Michael Pfaffermayr

    1. Department of Economics, University of Innsbruck, Universitaetsstrasse, Innsbruck, and Austrian Institute of Economic Research, Vienna and CESifo, Munich
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  • We are grateful to the managing editor, David Greenaway, the participants of the annual meeting of the Europan Association for Research in Industrial Economics (EARIE) 2007 in Valencia, the participants of the annual conference of the European Trade Study Group (ETSG) 2007 in Athens, the participants of the first FIW Research Conference International Economics 2007 in Vienna and seminar participants at the University of Innsbruck for useful comments and suggestions. Financial support from the Austrian Science Fund (grant no. P 17028-G05) and from the ‘Oesterreichische Nationalbank’ (OeNB, grant no. 12831) is gratefully acknowledged.

Abstract

There are two main options for companies to serve foreign markets: exports and foreign direct investment (FDI). Based on the Helpman et al. (2004) model for multiple host countries, this paper derives a clear theoretical prediction for the decision between both strategies. A bivariate probit model is estimated using a large data set of European companies to analyse the probability of using one or the other strategy. The empirical evidence indicates that more productive firms less (more) probably use the export (FDI) strategy to serve foreign markets. Moreover, a considerable number of companies use a combination of both the strategies to serve foreign markets, which is in line with a multiple-country model.

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