Type

Working Paper

Authors

J. Peter Neary

Subjects

Economics

Topics
commercial policy international trade policy f13 export platform fdi free trade cross border mergers and acquisitions trade liberalisation consolidation and merger of corporations foreign direct investment investments foreign

Trade costs and foreign direct investment (2005)

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, buthorizontal 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 FDIgrew 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.
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Full list of authors on original publication

J. Peter Neary

Experts in our system

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J. Peter Neary
University College Dublin
Total Publications: 79