Proximity Advantages, Scale Economies, and the Location of Production

Abstract

It has long been recognized that, at the level of the firm, the decision to export and the decision to invest abroad are interrelated. They both concern different ways of supplying foreign markets. However, it was not until the mid 1980s that any attempts were made to incorporate FDI and multinational firms into general equilibrium trade models (e.g., Helpman, 1984, 1985; Markusen, 1984; Ethier, 1986). As was explained in , recent contributions in this area of research have stressed the interplay between proximity advantages and concentration advantages in determining whether firms choose to become multinationals or national exporting firms. If transport costs or other trade costs such as tariffs are high, the firm will have an incentive to locate production directly on the market where the good is sold. On the other hand, if there are strong scale economies at the level of the plant, the firm will have an incentive to concentrate production in a few sites, thus making it more likely that a foreign market will be supplied through exports (Brainard, 1993a; Markusen and Venables, 1996).