A Linder Hypothesis for Foreign Direct Investment

Elhanan Helpman, Gene Grossman and Pablo Fajgelbaum ()

No 8639, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study patterns of FDI in a multi-country world economy. First, we present evidence for a broad sample of countries that firms direct FDI disproportionately to markets with income levels similar to their home market. Then 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 FDI, consistent with the patterns found in the data.

Keywords: Fdi; Monopolistic competition; Multinational corporations; Nested logit; Product quality; Trade; Vertical specialization (search for similar items in EconPapers)
JEL-codes: F12 F23 (search for similar items in EconPapers)
Date: 2011-11
New Economics Papers: this item is included in nep-opm
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Citations: View citations in EconPapers (10)

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Related works:
Journal Article: A Linder Hypothesis for Foreign Direct Investment (2015)
Working Paper: A Linder Hypothesis for Foreign Direct Investment (2013)
Working Paper: A Linder Hypothesis for Foreign Direct Investment (2011)
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