Foreign Direct Investment Strategies and Firms' Capabilities

Journal of Economics & Management Strategy, Vol. 8, No. 2, 1999

Posted: 21 Jul 2016

See all articles by Georges Siotis

Georges Siotis

Universidad Carlos III de Madrid - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: July 20, 1999

Abstract

This paper presents a simple model to analyse the impact of geographically localised spillovers on the internationalisation decision of firms. We argue that, once spatially bounded externalities are taken into account, the standard predictions on the nature and direction of foreign direct investment (FDI) flows may be reversed. For instance, the firm engaging in FDI does not necessarily enjoy a superior capability. We highlight three effects. First, an "agglomeration" effect: the presence of spillovers enhances the profitability of the FDI strategy when competitive gap between firms is narrow. Second, an "avoid diffusion" effect: firms may refrain from investing abroad for fear of dissipation of their firm specific assets. Third, a "sourcing" effect: the presence of spillovers may induce a firm to invest abroad, even in the absence of exporting costs.

Keywords: Foreign Direct Investment, Multinational Firms, Duopoly, Technology sourcing, Spillovers

JEL Classification: F23, L13, O3

Suggested Citation

Siotis, Georges, Foreign Direct Investment Strategies and Firms' Capabilities (July 20, 1999). Journal of Economics & Management Strategy, Vol. 8, No. 2, 1999, Available at SSRN: https://ssrn.com/abstract=2812163

Georges Siotis (Contact Author)

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain
+34 91 624 9312 (Phone)
+34 91 624 9875 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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