Abstract
In this paper we study the choice between exporting and foreign direct investment (FDI) in the Smith-Motta duopoly framework. First, we identify the conditions necessary for exporting and FDI, depending on the costs of exporting and the cost of foreign investment. Then, we discuss various proximity-concentration tradeoffs. Finally, we demonstrate that six possible types of equilibriums may emerge depending on various combinations of the key parameters of the model. These equilibriums include: a monopoly FDI equilibrium, a monopoly exporting equilibrium, a domestic monopoly equilibrium, a duopoly FDI equilibrium, a duopoly exporting equilibrium, and no entry equilibrium.
Highlights
There is extensive literature on the relationship between exporting and foreign direct investment (FDI)
Copithorne (1971), Horst (1971), and Hirsch (1976) attempted to model an exporting versus FDI decision of a monopolist using a simple partial equilibrium framework.2. In this framework the firm faced a trade-off between proximity to the foreign market obtained by setting up production plants abroad, which allowed to economize on transportation and tariff costs, and concentration of production in the home country and serving foreign markets by exporting, which allowed to economize on fixed costs of duplicating production capacity abroad
In this paper we have investigated the role of the proximity-concentration trade-off in the choice between exporting and FDI in the context of the Smith-Motta duopoly framework
Summary
There is extensive literature on the relationship between exporting and FDI. In this literature, several strands can be distinguished. 190 Andrzej Cieślik tic assumptions, such as constant returns to scale (CRS) and perfect competition, which were not in line with the key stylized facts on FDI.1 Another problem was that in the neoclassical approach firms were infinitely small, and it was not possible to study directly the foreign direct investment decisions that took place within the firm. Copithorne (1971), Horst (1971), and Hirsch (1976) attempted to model an exporting versus FDI decision of a monopolist using a simple partial equilibrium framework.2 In this framework the firm faced a trade-off between proximity to the foreign market obtained by setting up production plants abroad, which allowed to economize on transportation and tariff costs, and concentration of production in the home country and serving foreign markets by exporting, which allowed to economize on fixed costs of duplicating production capacity abroad. The firm would invest abroad in those industries in which the gains from avoiding trade costs outweighed the costs of setting up production plants abroad
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