Edi vs. Export

Multinational Enterprises: Export vs. FDI

Musawar Bajwa

Manhattan Institute of Management

Abstract

There are two main options for companies to serve foreign markets: exports and foreign direct investment (FDI). Based on the Helpman, Melitz and Yeaple (2004) model for multiple host countries this paper derives a clear theoretical prediction for the decision between both strategies. The empirical evidence indicates that more productive firms less (more) probably use the export (FDI) strategy to serve foreign markets. Moreover, a considerable number of companies use a combination of both strategies to serve foreign markets, which is in line with a multiple country model.

Keywords: FDI, Export, Multinational Enterprises

I. Introduction

II. Foreign Direct Investments

III. Differentiate FDI vs. Exports

IV. Theory of Multinational Enterprises

V. Impact FDI and Export

VI. Conclusion

I. Introduction

In recent years more and more companies have started to operate in international markets. In doing so, companies can choose between two major strategies to serve the foreign markets and to participate in the global economy. The more traditional mode is to export the produced goods to foreign markets. The other strategy is to engage in horizontal FDI and duplicate an existing production facility in foreign countries through foreign direct investment (FDI) and serve foreign demand locally. The aim of this paper is to bring more light into the question of the relationship between these two strategies. Brainard (1997) analyzes the location decision of multinational companies by a trade-off between proximity to customers and concentration of production stages to achieve scale economies. This has led to the knowledge capital model as analyzed by Markusen and Venables (2000) and Markusen (2002). Recent research focuses on productivity differences that determine the preferred strategy in models...