Export Versus FDI in Services

International Monetary Fund

No 2010/290, IMF Working Papers from International Monetary Fund

Abstract: In the literature on exports and investment, most productive firms are seen to invest abroad. In the Helpman et al. (2004) model, costs of transportation play a critical role in the decision about whether to serve foreign customers by exporting, or by producing abroad. We consider the case of tradable services, where the marginal cost of transport is near zero. We argue that in the purchase of services, buyers face uncertainty about product quality, especially when production is located far away. Firm optimisation then leads less productive firms to self-select themselves for FDI. We test this prediction with data from the Indian software industry and find support for it.

Keywords: WP; technical efficiency; fixed cost; FDI; Exports; Productivity; Heterogeneous firms; Software; Uncertainty; services company; firms export; firm productivity; firms lie; software firm; Foreign direct investment; Transportation; Service exports; Europe (search for similar items in EconPapers)
Pages: 24
Date: 2010-12-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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