Trade Cost Reduction and Foreign Direct Investment in a Vertical Structure

M. Emranul Haque, Arijit Mukherjee and Burcu Senalp

No 6689, CESifo Working Paper Series from CESifo

Abstract: Although empirical evidence shows that a lower trade cost and higher FDI may go hand in hand, the well-known “proximity-concentration” hypothesis does not support this view. We provide a simple explanation for this phenomenon. We show that a lower trade cost on the intermediate goods (with or without a trade cost reduction on the final goods) increases the incentive for FDI in the final goods market. In this respect, we show the roles played by the production technologies of the firms.

Date: 2017
New Economics Papers: this item is included in nep-int
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