The Economics Of Foreign Direct Investment And Trade With An Application To The U.S. Food Processing Industry

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Abstract
This paper investigates the determinants of foreign direct investment (FDI) and its relationship to trade in the U.S. food processing industry. A representative multinational corporation maximizes profits by choosing between production in the home country, which is exported, and production in a foreign country. This introduces the possibility that foreign affiliate sales can be a substitute and/or complement for exports. The empirical framework consists of a system of four equations with foreign affiliate sales, exports, affiliate employment, and FDI as endogenous variables. The results confirm a small substitution between foreign affiliate sales and exports. The empirical evidence supports the hypothesis that FDI is also protection-jumping.
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