Abstract
This paper analyzes the trade-off relationship between exports and horizontal FDI in response to a mutual recognition agreement (MRA) for technical regulations and certification procedures for import goods. As an MRA is concluded to reduce entry costs of exporting, multinationals (MNEs) derive more benefits from economies of scale than from tariff-jumping strategies, implying that they have more incentive to export than to perform horizontal FDI. In order to prove the above argument, the paper develops a monopolistic competition model with international trade, heterogeneous firms and MRA, based on the work of Helpman, Melitz and Yeaple (2004); and then tests empirically the theoretical results, utilizing data from U.S. multinational affiliate sales and exports. The empirical results show that MRAs have positive effects on the U.S. exports relative to horizontal FDI, bringing the results in line with the theoretical model.
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