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A Structural Model of Export versus Affiliates Production

Publication Date
  • F12
  • F23
  • Ddc:330
  • Multinational Firms
  • Trade
  • Multinationales Unternehmen
  • Exportindustrie
  • Auslandsproduktion
  • Landesgrösse
  • Transportkosten
  • Schätzung
  • Deutschland
  • Proximity-Concentration Theory


We derive and estimate an econometric model of export versus foreign production using firm-level data on foreign activities of German multinationals. Proximity-concentration theory which we derive our model from shows that firms face a trade-off between concentrating their production at home to save on plant set-up costs and producing abroad to save on distance costs. Firms facing this trade-off choose between export and foreign production according to their expected profits. The model is brought to the data using a pooled-probit analysis over the period 1996-1999. We find support for the proximity-concentration trade-off. In particular, market size and distance affect positively the probability of foreign production whereas fixed costs have a negative impact on the decision to engage in FDI.

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