Export-Platform Foreign Direct Investment

44 Pages Posted: 3 Mar 2003 Last revised: 2 Jan 2023

See all articles by Karolina Ekholm

Karolina Ekholm

Stockholm School of Economics - Department of Economics; Centre for Economic Policy Research (CEPR); Center for Business and Policy Studies (SNS); CESifo (Center for Economic Studies and Ifo Institute)

Rikard Forslid

Stockholm University; Centre for Economic Policy Research (CEPR)

James R. Markusen

University of Colorado at Boulder - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: March 2003

Abstract

Export-platform foreign direct investment in which the affiliate's output is (largely) sold in third markets rather than in the parent or host markets has received empirical attention recently, but little theoretical analysis. This paper is an attempt to make some sense of this phenomenon. We use a three-region model in which there are two identical, large, high-cost economies and a small low-cost economy. Pure export-platform production arises in a symmetric case, when a firm in each of the high-cost economies has a plant at home, and a plant in the low-cost country (the South) to serve the other high-cost country. This occurs when trade costs for intermediates (components) and plant-fixed costs are moderate and the South has a moderate cost advantage in assembly. Another interesting and empirically important case arises when there is trade liberalization between one of the high-cost countries and the small, low-cost country. The outside high-cost country may wish to build a branch plant inside the free trade area due to market size, but chooses the low-cost country on the basis of cost. Or a firm headquartered in the large country inside the free-trade area might build a single plant in its low-wage partner in order to serve their joint free-trade area and to export to the outside high-cost country.

Suggested Citation

Ekholm, Karolina and Forslid, Rikard and Markusen, James R., Export-Platform Foreign Direct Investment (March 2003). NBER Working Paper No. w9517, Available at SSRN: https://ssrn.com/abstract=385001

Karolina Ekholm

Stockholm School of Economics - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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CESifo (Center for Economic Studies and Ifo Institute)

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Rikard Forslid

Stockholm University ( email )

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Centre for Economic Policy Research (CEPR)

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James R. Markusen (Contact Author)

University of Colorado at Boulder - Department of Economics ( email )

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