Trade Cost Reduction and Foreign Direct Investment in a Vertical Structure
21 Pages Posted: 17 Nov 2017
Date Written: October 18, 2017
Abstract
Although empirical evidence shows that a lower trade cost and higher FDI may go hand in hand, the well-known “proximity-concentration” hypothesis does not support this view. We provide a simple explanation for this phenomenon. We show that a lower trade cost on the intermediate goods (with or without a trade cost reduction on the final goods) increases the incentive for FDI in the final goods market. In this respect, we show the roles played by the production technologies of the firms.
Suggested Citation: Suggested Citation
Haque, M. Emranul and Mukherjee, Arijit and Senalp, Burcu, Trade Cost Reduction and Foreign Direct Investment in a Vertical Structure (October 18, 2017). CESifo Working Paper Series No. 6689, Available at SSRN: https://ssrn.com/abstract=3072171 or http://dx.doi.org/10.2139/ssrn.3072171
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