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Implications of Financial Development of the South for Trade and Foreign Direct Investment from the North

Authors


  • The authors thank the two referees for their comments. The paper also benefitted from presentation at the IEFS China Annual Conference, 2012. Liu also thanks the National Science Foundation of China (project no. 71302009) and the “211 Project” of the University of International Business and Economics for their financial support.

Abstract

Using a North–South model of heterogeneous firms, the paper investigates the effects of the financial development of the South on the choice of international entry mode (export vs foreign direct investment [FDI]) of Northern firms. Such development facilitates the entry of local firms and thus intensifies product market competition. As a result, the intensive margins, extensive margins and total sales from export or FDI of Northern firms are all reduced. The paper provides conditions that determine whether export or FDI is affected more significantly. The results generate empirically testable hypotheses.

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