GEP Research Paper 06/30
Trade Cost, Technology Licensing and Foreign Direct Investment
Arijit Mukherjee and Kullapat Suetrong
Abstract
Recent evidences show the co-existence of lower trade cost and higher amount of foreign direct investment (FDI), which cannot be explained by the traditional “proximity-concentration trade-off”. We show that if both the home and the host country markets are important to the foreign firm, lower trade cost may increase FDI if the foreign and the host country firms differ in technologies. Whether lower trade cost increases welfare is ambiguous, and depends on its effects on FDI. We also show the impacts of technology licensing on FDI and welfare. Licensing substitutes FDI, and the effects of lower trade cost are ambiguous on the home country welfare and the host country welfare in presence of licensing. Whether, for a given trade cost, licensing (compared to no licensing) increases welfare is also ambiguous.
Issued in October 2006.
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