Export versus FDI with Heterogeneous Firms

• Published in: The American economic review Vol. 94; no. 1; pp. 300 - 316
• Main Authors: Helpman, Elhanan, Melitz, Marc J., Yeaple, Stephen R.
• Format: Journal Article
• Language: English
• Published: Nashville American Economic Association 01.03.2004
• Subjects: Coefficients; Domestic markets; Economic models; Economic theory; Economics; Enterprises; Exporters; Exports; Fixed costs; Foreign direct investment; Foreign investment; Foreign markets; Freight; International trade; Market entry; Multinational enterprises; Organizational behavior; Production costs; Productivity; Sales distribution; Shorter Papers; Studies; Tariffs; United States > US
• ISSN: 0002-8282; 1944-7981
• DOI: 10.1257/000282804322970814

This paper develops a model of international trade and investment in which firms can choose to serve their domestic market, to export, or to engage in foreign direct investment (FDI) in order to serve foreign markets. Every industry is populated by heterogeneous firms, which differ in productivity levels. As a result, firms sort according to productivity into different organizational forms. The least productive firms leave the industry, because, if they stay, their operating profits will be negative no matter how they organize. Other low-productivity firms choose to serve only the domestic market. The remaining firms serve the domestic market as well as foreign markets. Their mode of operation in foreign markets differs, however. The most productive firms in this group choose to invest in foreign markets while the less productive firms choose to export. Using data on exports and FDI sales of US firms in 38 countries and 52 industries, this study estimated the effects of trade frictions, economies of scale, and within-industry dispersion of firm size, on exports versus FDI sales. The results show a robust cross-sectoral relationship between the degree of dispersion in firms size and the tendency of firms to substitute FDI sales for exports. The size of this effect is of the same order of magnitude as trade frictions.