FDI and trade for foreign market entry: theory and evidence from Estonia

Per Botolf Maurseth, Jaan Masso () and Rasmus Bøgh Holmen
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Per Botolf Maurseth: BI – Norwegian Business School, Oslo, Norway
Jaan Masso: School of Economics and Business Administration, University of Tartu, Tartu, Estonia
Rasmus Bøgh Holmen: Centre for Applied Research, NHH Norwegian School of Economics, Bergen, Norway

Baltic Journal of Economics, 2025, vol. 25, issue 1, 39-71

Abstract: This article investigates firms' strategies for international expansion, foreign direct investment (FDI) and exports. We use the framework of Helpman et al. (2004) to illustrate how firm-level productivity differences influence these strategies. We extend this model with multifactor production processes, encompassing both trade in goods and services. The model predicts that trade and FDI can be both substitutes and complements. Our empirical analysis uses detailed Estonian firm-market-level data to explore the model's predictions by estimating the intensive and extensive trade margins and internationalization choices of firms between trade and FDI. The empirical findings indicate that selection into exporting is determined by past productivity. There is evidence consistent with spillover effects in goods exports from other exporters to the same destination. Outward FDI complements both goods and services exports. Our findings underscore the complexity of firms' choices for international expansion, urging a nuanced dichotomy between FDI and exports.

Keywords: Exporting; outward foreigndirect investments; verticaland horizontal FDI; trade models (search for similar items in EconPapers)
JEL-codes: F14 F23 L25 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:bic:journl:v:25:y:2025:i:1:p:39-71

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