The Trade-Off between Foreign Direct Investments and Exports: The Role of Multiple Dimensions of Distance

Tinbergen Institute Discussion Paper 09-050/3

25 Pages Posted: 5 Jun 2009

See all articles by Maureen B. M. Lankhuizen

Maureen B. M. Lankhuizen

affiliation not provided to SSRN

Henri L. F. de Groot

VU University Amsterdam - Department of Spatial Economics; Tinbergen Institute

Gert-Jan Linders

Ministry of Social Affairs and Employmen

Date Written: June 4, 2009

Abstract

To serve foreign markets, firms can either export or set up a local subsidiary through horizontal Foreign Direct Investment (FDI). The conventional proximity-concentration theory suggests that FDI substitutes for trade if distance between countries is large, while exports become more important if scale economies in production are large. This paper investigates empirically the effect of different dimensions of distance on the choice between exports and FDI. We find that different dimensions of distance affect exports and FDI differently. There is clear evidence of a proximity-concentration trade-off in geographical terms: the share of FDI sales in total foreign sales (exports and FDI sales) increases with geographical distance. The positive relation between import tariffs and FDI intensity provides further evidence for a trade-off resulting from trade costs. On the other hand, the share of FDI decreases with language differences and cultural and institutional barriers. The latter dimensions of distance thus affect FDI more strongly than exports.

Keywords: cultural distance, institutions, FDI and trade, spatial interaction models

JEL Classification: F14, F21, F23

Suggested Citation

Lankhuizen, Maureen B. M. and de Groot, Henri L.F. and Linders, Gert-Jan, The Trade-Off between Foreign Direct Investments and Exports: The Role of Multiple Dimensions of Distance (June 4, 2009). Tinbergen Institute Discussion Paper 09-050/3, Available at SSRN: https://ssrn.com/abstract=1414226 or http://dx.doi.org/10.2139/ssrn.1414226

Maureen B. M. Lankhuizen (Contact Author)

affiliation not provided to SSRN ( email )

Henri L.F. De Groot

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6168 (Phone)
+31 20 598 6004 (Fax)

Tinbergen Institute

Gustav Mahlerplein 17
Amsterdam, 1082 MS
Netherlands

Gert-Jan Linders

Ministry of Social Affairs and Employmen ( email )

Den Haag
Netherlands

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