Export Versus FDI in Services

Author/Editor:

International Monetary Fund

Publication Date:

December 1, 2010

Electronic Access:

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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.

Series:

Working Paper No. 10/290

Subject:

Frequency:

Quarterly

English

Publication Date:

December 1, 2010

ISBN/ISSN:

9781455211715/1018-5941

Stock No:

WPIEA2010290

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

24

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