Export Versus FDI

49 Pages Posted: 21 Mar 2003

See all articles by Elhanan Helpman

Elhanan Helpman

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Marc J. Melitz

Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Stephen R. Yeaple

Pennsylvania State University - College of the Liberal Arts - Department of Economic; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: March 2003

Abstract

This paper builds a multi-country, multi-sector general equilibrium model that explains the decision of heterogeneous firms to serve foreign markets either through exports or local subsidiary sales (FDI). These modes of market access involve different relative costs, some of which are sunk while others vary with sales volume (such as transport costs and tariffs). Relative to investment in a subsidiary, exporting involves lower sunk costs but higher per-unit costs. In equilibrium, only the more productive firms choose to serve the foreign markets and the most productive among this group will further choose to serve the overseas market via FDI. The paper then explores several implications of the individual firms' decisions for aggregate export and FDI sales relative to the domestic and foreign market sizes. In particular, it is shown that firm level heterogeneity is an important determinant of relative export and FDI flows.

We use the model to derive testable empirical predictions on the relative aggregate export and FDI sales in a given country for a given sector based both on relative costs and the extent of firm level heterogeneity in that sector. These predictions are tested on data of US affiliate sales and US exports in 38 different countries and 52 sectors. The comparative statics based on relative costs are very similar to those tested by Brainard (AER 1997) and are confirmed in our data: sector/country specific transport costs and tariffs have a strong negative effect on export sales relative to FDI. More importantly, our new predictions for the effects of firm-level heterogeneity on the relative export and FDI sales are also strongly supported by the data: more heterogeneity leads to significantly more FDI sales relative to export sales.

Suggested Citation

Helpman, Elhanan and Melitz, Marc J. and Yeaple, Stephen R., Export Versus FDI (March 2003). Harvard Institute of Economic Research Discussion Paper No. 1998. Available at SSRN: https://ssrn.com/abstract=386924 or http://dx.doi.org/10.2139/ssrn.386924

Elhanan Helpman (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-4690 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Marc J. Melitz

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-8297 (Phone)
617-417-6536 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stephen R. Yeaple

Pennsylvania State University - College of the Liberal Arts - Department of Economic ( email )

524 Kern Graduate Building
University Park, PA 16802-3306
United States
8148655452 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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