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Trade costs and foreign direct investment
Neary, J. Peter
This paper reviews the theory of foreign direct investment (FDI), focusing on an apparent con‡ict between theory and recent trends in the globalized world. The bulk of FDI is horizontal rather than vertical, but horizontal FDI is discouraged when trade costs fall. This seems to conflict with the experience of the 1990s, when trade liberalisation and technological change led to dramatic reductions in trade costs yet FDI grew much faster than trade. Two possible resolutions to this paradox are explored. First, horizontal FDI in trading blocs is encouraged by intra-bloc trade liberalisation, because foreign firms establish plants in one country as export platforms to serve the bloc as a whole. Second, cross-border mergers, which are quantitatively more important than greenfield FDI, are encouraged rather than discouraged by falling trade costs.
Keyword(s): Cross-border mergers and acquisitions; Export platform FDI; Foreign direct investment; International trade policy; Trade liberalisation; F13; Commercial policy; Consolidation and merger of corporations; Investments, Foreign; Free trade
Publication Date:
Type: Working paper
Peer-Reviewed: Unknown
Language(s): English
Institution: University College Dublin
Publisher(s): University College Dublin. School of Economics
File Format(s): other; application/pdf
First Indexed: 2012-08-25 05:22:55 Last Updated: 2018-10-11 15:44:46