Export Versus FDI in Services

December 1, 2010

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Format: Chicago

Export Versus FDI in Services, (USA: International Monetary Fund, 2010) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Balance of payments, Exports, Foreign direct investment, International trade, National accounts, Production, Productivity, Service exports, Transportation

Keywords: Europe, Exports, FDI, Firm productivity, Firms export, Firms lie, Fixed cost, Foreign direct investment, Heterogeneous firms, Productivity, Service exports, Services company, Software, Software firm, Technical efficiency, Transportation, Uncertainty, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/290
Stock No:

WPIEA2010290
ISBN:

9781455211715
ISSN:

1018-5941

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