Service innovation and the proximity-concentration trade-off model of trade and FDI

Castellacci, Fulvio

Service innovation and the proximity-concentration trade-off model of trade and FDI

MPRA Paper from University Library of Munich, Germany

Abstract: This paper introduces service innovation in the proximity-concentration trade-off model of trade and FDI (Helpman, Melitz and Yeaple, 2004). The idea is that innovation will have two main effects on service firms’ choice between exports and FDI. First, innovative firms will on average have higher productivity levels than non-innovative enterprises. Secondly, innovators will have to pay a higher relational distance cost for undertaking export activities, and they will therefore prefer to avoid (or reduce) these costs by choosing a FDI strategy instead. We test the empirical relevance of this idea on a new survey dataset for a representative sample of firms in all business service sectors in Norway. The results show that firms are more likely to choose FDI rather than export the greater their productivity level and the higher the relational distance costs they face.

Keywords: Service sectors; innovation; export; FDI; firm heterogeneity; survey data (search for similar items in EconPapers)
JEL-codes: F10 F15 O33 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-ino, nep-int and nep-sbm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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