Transportation Cost and the Geography of Foreign Investment
42 Pages Posted: 10 Jan 2017 Last revised: 21 Jan 2017
Date Written: January 20, 2017
Falling transportation costs and rapid technological progress in recent decades have precipitated an explosion of cross-border flows in goods, services, investments, and ideas led by multinational .rms. Extensive research has sought to understand the geographic patterns of foreign direct investment (FDI). This chapter reviews existing theories and evidence specifically addressing questions including: How is FDI distributed across space? Why does the law of gravity apply? How do the costs of transporting goods, tasks, and technologies influence firms’ decisions to separate tasks geographically and locate relative to one another? We discuss a variety of theoretical mechanisms through which transport cost and other geographic friction influence FDI and present the key empirical studies and findings.
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