Reverse importing and asymmetric trade and FDI: a networks explanation

Abstract

This paper considers the impact of business and social networks on international trade and foreign direct investment (FDI). I propose that differences in the strength of network effects across countries can produce asymmetric trade and investment flows that may lead to trade friction. This proposition is examined using a model of multi-product producers of a differentiated product. A firm from a country with strong network effects has a cost advantage in selling to buyers from its own country. This advantage results in lower inward FDI, lower total imports but larger volumes of reverse imports (i.e., imports from overseas affiliates of that country's own firms) into the country with strong network effects. The model's predictions match observed asymmetric trade and investment flows that sometimes lead to US-Japan trade friction in industries such as automobiles.

Privatization in the presence of foreign competition and strategic policies

“…15 Hence, any change in the domestic country does not a¤ect the outcome in the foreign country. A signi…cant extension of this model would be to investigate the robustness of the model when introducing market demand in the foreign country.…”

“…We leave this issue for future research. 15 High cost needed to serve the foreign market may prevent the domestic …rm from entering the foreign market. Das et al (2007) show that there is a signi…cant …xed cost of exporting.…”

“…Das et al (2007) show that there is a signi…cant …xed cost of exporting. Moreover, buyer-seller networks may be important for both international trade and investment (Greaney, 2003), and high network costs may prevent the foreign …rm in the model from serving the export markets. We see from (14) and (24) We see that 0 < R < 1 and is negative.…”

FDI with Reverse Imports and Hollowing Out

“…4) Also, this paper assumes that in both the home and foreign countries, the monopoly firm , s production function is X=l where l denotes the quantity of labor hired.…”

“…Various factors have been discussed as causes of outward FDI; heterogeneity in productivity among domestic firms (Helpman et al 2004), networks to sell products to buyers from the same country (Greaney 2003), expectation of demand growth in the FDI host country (Rob and Vettas 2003), and marginal-cost differences This paper theoretically analyzes a lower wage in the FDI host country as a cause of FDI with reverse imports from the FDI host country. The home country is assumed to have two sectors, competitive and monopoly ones.…”