Export-Supporting FDI

Wholesale trade affiliates account for a considerable fraction of the sales of Multinational Companies (MNCs). However, this and similar types of FDI, aiming at facilitating export activities, have received little attention in the literature. In this paper export-supporting FDI (ESFDI) which is characterized by destination-market specific export-supporting distribution and service activities in the foreign market, keeping production in the home country, is introduced as a theoretical concept. It is included into a model of international trade and FDI with heterogeneous firms. In equilibrium lower trade costs increase ESFDI. This implies that both FDI activities and trade volumes increase at the same time. The model thus provides a rationale for the positive correlation between trade and FDI activity observed in the 1990s and the prevalence of intra Euro-area investments in the FDI activities of Euro-area MNCs, which are both at odds with the 'proximity-concentration trade-off' governing standard models of horizontal FDI