Working Paper: NBER ID: w17550
Authors: Pablo D. Fajgelbaum; Gene M. Grossman; Elhanan Helpman
Abstract: We study patterns of FDI in a multi-country world economy. We develop a model featuring non-homothetic preferences for quality and monopolistic competition in which specialization is purely demand-driven and the decision to serve foreign countries via exports or FDI depends on a proximity-concentration trade-off. We characterize the joint patterns of trade and FDI when countries differ in income distribution and size and show that FDI is more likely to occur between countries with similar per capita income levels. The model predicts a Linder Hypothesis for horizontal FDI, which is consistent with the patterns we find using establishment-level data on multinational activity.
Keywords: Foreign Direct Investment; Linder Hypothesis; Nonhomothetic Preferences; Monopolistic Competition
JEL Codes: F12; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| FDI (F23) | Similar per capita income levels (F40) |
| Similar per capita income levels (F40) | FDI (F23) |
| Income gap (D31) | Bilateral multinational activity (F53) |
| Bilateral multinational activity (F53) | FDI (F23) |
| Proximity-concentration tradeoff (F12) | FDI (F23) |
| Homemarket effect (F61) | FDI (F23) |