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Export versus FDI in services

Rudrani Bhattacharya (), Ila Patnaik () and Ajay Shah ()
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Rudrani Bhattacharya: National Institute of Public Finance and Policy
Ila Patnaik: National Institute of Public Finance and Policy

Working Papers from National Institute of Public Finance and Policy

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.

New Economics Papers: this item is included in nep-ifn and nep-int
Date: 2011-01
Note: Working Paper 77, 2011
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