THE ROLE OF FDI IN FOSTERING EXPORTS FROM THE HOST COUNTRY

Abstract

In this paper, I propose a theoretical model analyzing the impact of FDI on exports from the host country. Using the framework of monopolistic competition with heterogenous firms, I show that the entry of highly efficient MNEs increases competition in the export market, which leads to crowding-out of domestic exporters. As a result, even though overall efficiency of the industry increases, exports by this industry may decrease. Further on, I add into my model a potential spillover effect that FDI can induce by lowering costs associated to export activities for all firms. I show that in such situation, the increased efficiency is more likely to outweigh the negative competition effect, resulting in larger exports from the host country.

Data:
Received: 12 Jun 2015
Revised: 6 Aug 2015
Accepted: 6 Sep 2015
Published: 20 Sep 2015