Exporting Versus Direct Investment Under Local Sourcing
OSU Department of Economics Working Paper No. 00-10
27 Pages Posted: 19 Aug 2000
Date Written: July 6, 2000
This paper agrues that the prices of intermediates may influence the pattern of foreign direct investment (FDI). In our model, two downstream firms select whether to serve each other's markets through exports of FDI, always sourcing the intermediate good or service at the location of production. The model generates a prediction that is consistent with the stylized fact that two-way FDI occurs when the market sizes of the two countries are similar. Welfare analysis provides two interesting results: host countries may have incentives to attract FDI, and global welfare in not monotonically related to the degree of FDI.
Keywords: Foreign Direct Investment, Oligopoly, Intermediate Goods and Services, Multinational Firms
JEL Classification: F12, F13, F23, L13
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