The proximity‐concentration trade‐off with multi‐product firms: Are exports and FDI complements or substitutes?

Abstract

Standard horizontal foreign direct investment (FDI) models predict substitutability between FDI and exports in light of the proximity‐concentration trade‐off, nonetheless, empirical literature finds, almost invariably, a complementarity effect. We show that given the multi‐product nature of multinational enterprises both effects coexist at the firm‐level, with a substitutability for some products and a complementarity for others, explaining why the empirical substitutability relation has been so scarce even at the level of the firm. We use detailed French firm‐level data over 2002 and 2009 to show that the question of whether FDI and exports are complements or substitutes depends on whether the product belongs to the core competency of the firm and the size of demand in the destination market. We find evidence of the substitutability predicted by standard horizontal FDI models, taking place only for the best performing products of the firm and in high‐demand markets. In turn, vertical linkages and proximity advantages related to FDI's foreign presence generate exports of intermediates and products that are further away of the firms' core competency. This complementarity jeopardises the substitutability when aggregating all products of the firm, resulting on an average null net effect of FDI on exports in high‐demand countries.

Differences in impact of official development assistance on foreign direct investment by aid types

“…Regarding the relationship between exports and FDI, Bricongne et al (2022) showed that horizontal FDI is a substitute for exports while vertical FDI is a complement to exports, indicating that the effects of exports on FDI are mixed. An estimation of Equation (1) with an export variable was performed, and since the export variable was not significant, it was determined that the effects of exports were mixed and was not included in the estimation for this study.…”

Going Dutch? Firm exports and FDI in the wake of the 2014 EU‐Russia sanctions

“…All results are available from the authors upon request. 18 For a recent discussion on the complementarity versus substitutability tradeoff between FDI and exports, see Bricongne et al (2023). 19 See https://www.government.nl/documents/directives/2012/04/12/user-guide-on-strategic-goods-and-services for the Government of the Netherlands' official user guide on strategic goods and services, accessed November 15, 2022.…”

“…18 18 For a recent discussion on the complementarity versus substitutability tradeoff between FDI and exports, see Bricongne et al (2023). …”

Complementarity Versus Substitution Relationship between Outward FDI and Exports: Evidence from India

“…Using French firm-level data over 2002 to 2009, Bricongne et al (2023) show that whether FDI and exports are complements or substitutes depends on whether the product belongs to the core competency of the firm and the size of demand in the destination market. The study reports evidence of the substitutability predicted by standard horizontal FDI models, taking place only for the firm’s best-performing products and in high-demand markets.…”