Essays on foreign direct investment and trade

Raybaudi-Massilia, Marzia (1997) Essays on foreign direct investment and trade. University of Southampton, Doctoral Thesis.

Abstract

This thesis studies the choice between trade and foreign direct investment (FDI) with three different perspectives.

An Economic Geography approach has been taken to study the location patterns of single- and double-plant firms in a two country, two sector and two factor model where multinational firms and exporters are allowed to coexist. Using model simulations techniques it has been shown that the tendency towards configurations characterized by an "industrial core" and an "agricultural periphery" is reduced by the presence of multinational firms.

An industrial Organization approach has been adopted to study the behaviour of international leading firms in a strategic framework. A situation where an international leader faces endogenous home market conditions, in the sense that home market profits change with the choice of foreign market penetration, has been considered. It has been shown that equilibria where entry by local competitors is accommodated or where exporting constitutes an entry barrier might emerge, together with the traditional result of entry deterrence through FDI.

Finally, an Option Pricing approach has been used to study the choice between FDI and trace when there is uncertainty over the exchange rate. It has been shown that the level of the foreign exchange rate at which a firm decides to become multinational is smaller than that at which such a firm would become an exporter. Furthermore a higher volatility in the exchange rate affects more an exporter than a multinational firm. Therefore, any change in the exchange rate has a weaker overall impact on FDI than on trade and multinational production provides a greater hedge against exchange rate uncertainty than trade does.

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