Exporting versus Foreign Direct Investment

Donnenfeld, Shabtai; Weber, Shlomo

doi:2000.15.1.100

The Journal of Economic Integration 2000 March;15(1) :100-126.
DOI: https://doi.org/10.11130/jei.2000.15.1.100

Exporting versus Foreign Direct Investment

Shabtai Donnenfeld, Shlomo Weber,

Southern Methodist University

ABSTRACT

In this paper we investigate how strategic aspects influence the choice between exporting and servicing foreign markets by setting up a plant in the foreign country. We show that tariffs on imports in conjunction with the size of the set up costs incurred while setting up plants and the size of the foreign market will determine whether domestic firms which face competition from a foreign firm will choose to deter foreign direct investment (FDI), prevent exports or may accommodate either form of penetration of a foreign firm in their market. Our analysis reveals that there is no simple relationship between the size of the tariff and the propensity of foreign firms to engage in foreign direct investment. Higher tariffs may result in exports rather than FDI. Furthermore, due to actual competition among domestic firms while facing potential competition in the form of FDI, a rise in tariffs may lead to a decrease in domestic output. (JEL Classifications: F12, F21) <

Keywords: Tariff jumping | Foreign direct investment | Imperfect competition

REFERENCE

1.	Markusen, J. [1997], "A Unified Treatment of Horizontal Direct Investment," NBER Working Paper No. 5696.

2.	Graham, E. M. and P. Krugman [1991], Foreign Direct Investment in the United States, Washington, D.C.: The Institute for International Economics.