Trade costs and foreign direct investment

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Title: Trade costs and foreign direct investment
Authors: Neary, J. Peter
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Date: Aug-2005
Online since: 2009-07-22T13:27:20Z
Abstract: 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.
Type of material: Working Paper
Publisher: University College Dublin. School of Economics
Series/Report no.: UCD Centre for Economic Research Working Paper Series; WP05/12
Keywords: Cross-border mergers and acquisitionsExport platform FDIForeign direct investmentInternational trade policyTrade liberalisation
metadata.dc.subject.classification: F13
Subject LCSH: Commercial policy
Consolidation and merger of corporations
Investments, Foreign
Free trade
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Language: en
Status of Item: Not peer reviewed
Appears in Collections:Economics Working Papers & Policy Papers

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