Service innovation and the proximity-concentration trade-off model of trade and FDI

Fulvio, Castellacci (2011): Service innovation and the proximity-concentration trade-off model of trade and FDI.

Abstract

This paper introduces service innovation in the proximity-concentration trade-off model of trade and FDI (Helpman, Melitz and Yeaple, 2004). The idea is that innovation will have two main effects on service firms’ choice between exports and FDI. First, innovative firms will on average have higher productivity levels than non-innovative enterprises. Secondly, innovators will have to pay a higher relational distance cost for undertaking export activities, and they will therefore prefer to avoid (or reduce) these costs by choosing a FDI strategy instead. We test the empirical relevance of this idea on a new survey dataset for a representative sample of firms in all business service sectors in Norway. The results show that firms are more likely to choose FDI rather than export the greater their productivity level and the higher the relational distance costs they face.

• Item Type: MPRA Paper
• Language: English
• Keywords: Service sectors; innovation; export; FDI; firm heterogeneity; survey data
• Subjects: F - International Economics > F1 - Trade > F15 - Economic Integration; F - International Economics > F1 - Trade > F10 - General; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O33 - Technological Change: Choices and Consequences ; Diffusion Processes

References

Arnold, J. and Hussinger, K. (2010): “Exports versus FDI in German manufacturing: firm performance and participation in international markets”, Review of International Economics, 18 (4): 595-606.

Aw, B. Y., Roberts, M. and Winston, T. (2007): “The complementary role of exports and R&D investments as sources of productivity growth”, The World Economy, 30: 83-104.

Baldwin, R. and Ottaviano, G. (2001): “Multiproduct multinationals and reciprocal FDI dumping”, Journal of International Economics, 54: 429-448.

Bernard, A., Eaton, J., Jensen, B. and Kortum, S. (2003): “Plants and productivity in international trade”, American Economic Review, 93 (4): 1268-1290.

Bernard, A., Jensen, B., Redding, S. and Schott, P. (2007): “Firms in international trade”, Journal of Economic Perspectives, 21 (3): 105-130.

Blum, B. and Goldfarb, A. (2006): “Does the Internet defy the law of gravity?”, Journal of International Economics, 70 (2): 384-405.

Brainard, S. L. (1993): “A simple theory of multinational corporations and trade with a trade-off between proximity and concentration”, NBER Working Paper No. 4269.

Brainard, S. L. (1997): “An empirical assessment of the proximity-concentration trade-off between multinational sales and trade”, American Economic Review, 87 (4): 520-544.

Breinlich, H. and Criscuolo, C. (2011): “International trade in services: A portrait of importers and exporters”, Journal of International Economics, in press.

Castellacci, F. (2008): “Technological paradigm, regimes and trajectories: Manufacturing and service industries in a new taxonomy of sectoral patterns of innovation”, Research Policy, 37: 978-994.

Castellacci, F. (2010): “Firm heterogeneity, international cooperations and export participation”, NUPI Working Paper 781.

Castellacci, F. (2011a): “Technology, heterogeneity and international competitiveness: Insights from the mainstream and evolutionary economics paradigms”, in Jovanovic, M. (ed.), International Handbook of Economic Integration, Edward Elgar.

Castellacci, F. (2011b): “How does competition affect the relationship between innovation and productivity? Estimation of a CDM model for Norway”, Economics of Innovation and New Technology, in press.

Costantini, J. and Melitz, M. (2007): “The dynamics of firm-level adjustment to trade liberalization”, mimeo.

Ekholm, K., Forslid, R. and Markusen, J. (2003): “Export-platform foreign direct investments”, NBER Working Paper 9517.

Freund, C. and Weinhold, D. (2002): “The Internet and international trade in services”, American Economic Review, 92 (2): 236-240.

Ganotakis, P. and Love, J. (2011): “R&D, product innovation, and exporting: evidence from UK new technology based firms”, Oxford Economic Papers, 63 (2): 279-306.

Girma, S., Kneller, R. and Pisu, M. (2003): “Exports versus FDI: an empirical test”, GEP Research Paper 2003/21.

Greenaway, D. and Kneller, R. (2007): “Firm heterogeneity, exporting and foreign direct investment”, Economic Journal, 117: 134-161.

Grossman, G., Helpman, E. and Szeidl, A. (2006): “Optimal integration strategies for the multinational firm”, Journal of International Economics, 70: 216-238.

Head, K. and Ries, J. (2001): “Overseas investment and firm exports”, Review of International Economics, 9 (1): 108-122.

Head, K. and Ries, J. (2004): “Exporting and FDI as alternative strategies”, Oxford Review of Economic Policy, 20 (3): 409-423.

Helpman, E., Melitz, M. and Yeaple, S. R. (2004): “Export versus FDI with heterogeneous firms”, American Economic Review, 94 (1): 300-316.

Hoeckman, B. (2006): “Liberalizing trade in services: A survey”, World Bank Policy Research Working Paper 4030.

Kiyota, K. and Urata, S. (2007): “The role of multinational firms in international trade: the case of Japan”, RSIE Discussion Paper No. 560.

Mayer, T. and Ottaviano, G. (2007): “The happy few: The internationalization of European firms”, Bruegel Blueprint Series, Volume III.

Melitz, M. (2003): “The impact of trade on intra-industry reallocations and aggregate industry productivity”, Econometrica, 71 (6): 1695-1725.

Moxnes, A. (2010): “Are sunk costs in exporting country specific?”, Canadian Journal of Economics, 43 (2): 467-493.

Rauch, J. (1999): “Networks versus markets in international trade”, Journal of International Economics, 48 (1): 7-35.

Tomiura, E. (2007): “Foreign outsourcing, exporting and FDI: a productivity comparison at the firm level”, Journal of International Economics, 72: 113-127.

Vogel and Wagner (2010): “Exports and profitability: first evidence for German business services enterprises”, Applied Economics Quarterly, 56 (1): 7-30.

Wagner, J. (2007): “Exports and productivity: A survey of the evidence from firm-level data”, The World Economy, 30 (1): 60-82.

Yeaple, S. R. (2003): “The complex integration strategies of multinationals and cross country dependencies in the structure of foreign direct investment”, Journal of International Economics, 60: 293-314.