Trade cost reduction and foreign direct investment

While the “proximity-concentration” theory suggests a positive relationship between trade cost and foreign direct investment (FDI), there is ample evidence showing a negative relationship between them. We show that the possibility of exporting back to the home country from a host country, which is often referred as “home-country export platform FDI”, may generate a negative relationship between trade cost and FDI. Market demand and product market competition may play important roles in this respect.     

Privatization, Incentive Delegation and Foreign Direct Investment

Despite the empirical relevance, the privatization literature paid little attention to the effects of the owner-manager relationship and the implications of foreign direct investment (FDI). We focus on these aspects, and show the relationship between privatization and greenfield FDI when the owners design strategic managerial incentive contracts. We show that there is complementarity between privatization and greenfield FDI. Whether incentive delegation (compared to no incentive delegation) increases the degree of privatization in the presence of FDI is ambiguous; it depends on whether the degree of privatization that attracts FDI is higher or lower than the degree of privatization that maximizes domestic welfare under FDI.     

Privatization, strategic foreign direct investment and host-country welfare

Recent evidence shows that developing countries and transition economies are increasingly privatizing their public firms and at the same time experiencing rapid growth of inward foreign direct investment (FDI). We show that there is a two-way causality between privatization and greenfield FDI. Privatization increases the incentive for FDI, which, in turn, increases the incentive for privatization compared to the situation of no FDI. The optimal degree of privatization depends on the cost difference of the firms, and on the foreign firm's mode of entry.