Exporting Versus Direct Investment Under Local Sourcing

OSU Department of Economics Working Paper No. 00-10

27 Pages Posted: 19 Aug 2000

See all articles by Amy Jocelyn Glass

Amy Jocelyn Glass

Texas A&M University - Department of Economics

Kamal Saggi

Southern Methodist University (SMU) - Department of Economics

Date Written: July 6, 2000

Abstract

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

Suggested Citation

Glass, Amy Jocelyn and Saggi, Kamal, Exporting Versus Direct Investment Under Local Sourcing (July 6, 2000). OSU Department of Economics Working Paper No. 00-10, Available at SSRN: https://ssrn.com/abstract=235483 or http://dx.doi.org/10.2139/ssrn.235483

Amy Jocelyn Glass (Contact Author)

Texas A&M University - Department of Economics ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States
979-845-8507 (Phone)
979-847-8757 (Fax)

Kamal Saggi

Southern Methodist University (SMU) - Department of Economics ( email )

Dallas, TX 75275
United States
214-768-3274 (Phone)
214-768-1821 (Fax)

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