Export-Platform Foreign Direct Investment: Theory and Evidence

Authors


  • I am grateful to my thesis adviser, Professor Richard E. Baldwin at the Graduate Institute, Geneva, for his invaluable advice. I would also like to express my sincere gratitude to anonymous referee(s) and the editor of this journal for their invaluable suggestions and to the seminar participants at ETSG 2010, Keio University, and Chukyo University for their useful comments. Financial support from the Japan Society for the Promotion of Science (Grant-in-Aid B-22330080) is gratefully acknowledged. The usual disclaimer applies.

Abstract

This paper proposes a model that accounts for ‘export-platform’ FDI – a form of FDI that is common in the data but rarely discussed in the theoretical literature. Unlike the previous literature, this paper’s theory nests all the typical modes of supply, including exports, horizontal and vertical FDI, horizontal and vertical export-platform FDI. The theory yields the testable hypothesis that a decrease in either inter-regional or intra-regional trade costs induces firms to choose export-platform FDI. The empirical analysis provides descriptive statistics that point to large proportions of third country exports of US FDI, and an econometric analysis, whose results are in line with the model’s predictions. The paper suggests policy implications for nations seeking to attract FDI.

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