Exporting or investing abroad: what is the most profitable?

Jean Louis Brillet and Jean Louis Brillet

No 4551, EcoMod2012 from EcoMod

Abstract: The rapid development of developing countries, particularly in Asia, and the establishment of trade agreements, make these markets more attractive to western firms, all the more as growth is stagnating in their own countries. But several strategies are possible: • Simply profit from the situation to direct their production to these new markets, or create new capacities if needed. • Create new capacities of production in the target country, taking advantage of the improvement of local conditions ("Greenfield" investment). • Take stakes or simply buy local companies (“portfolio” investment If these three types of decision have similar goals (increasing profits, by additional sales, better unitary margins or both), the conditions for their success are quite different. For example: • Liberalization of the local import quotas will benefit mainly foreign exports. • Increasing export quotas will favor a local implementation. • A decrease in local customs duties will increase imports, but investing locally will profit from lower prices and wages to export. As seen, the mechanisms are complex, varied and their consequences can evolve strongly with the horizon (including a change of sign in the last case). For this study, we use two econometric models, for Vietnam and China. In each of these models, the role of FDI is fully formalized. The "Greenfield" type FDIs are estimated by a relationship involving profitability and prospects for sale (locally and abroad). They affect both the productivity of the factors and potential exports, but partially substitute for investments by local agents. In the country model, we separate local and FDI production capacity. This will allow us to differentiate in particular • The productivity of factors (labor, capital) • Intermediate consumptions and their import share. • The origin of capital equipment • Intermediate consumptions and their import share. • The faculty to export. • The size of the country We will analyze the optimality of the three strategies, on a number of parameters, among which: • Horizon (and discount rate). • Local situation (taxation, productivity of the factors, the price level, market potential of the country). • Measures taken under commercial agreements. As well as elements of the formulations themselves: • Sensitivity of international trade to the price competitiveness. • Substitutability between local and foreign investment. • Sensitivity of the inflation growth. Our goal will be more understanding of the problem of the subject, that of say a diagnosis. .

Keywords: China; Vietnam; Macroeconometric modeling; Developing countries (search for similar items in EconPapers)
Date: 2012-07-01
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Persistent link: https://EconPapers.repec.org/RePEc:ekd:002672:4551

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