NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Linder Hypothesis for Foreign Direct Investment

Pablo D. Fajgelbaum, Gene M. Grossman, Elhanan Helpman

NBER Working Paper No. 17550
Issued in October 2011
NBER Program(s):   ITI

We study patterns of FDI in a multi-country world economy. We develop a model featuring non-homothetic preferences for quality and monopolistic competition in which specialization is purely demand-driven and the decision to serve foreign countries via exports or FDI depends on a proximity-concentration trade-off. We characterize the joint patterns of trade and FDI when countries differ in income distribution and size and show that FDI is more likely to occur between countries with similar per capita income levels. The model predicts a Linder Hypothesis for horizontal FDI, which is consistent with the patterns we find using establishment-level data on multinational activity.

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This paper was revised on August 11, 2014

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Document Object Identifier (DOI): 10.3386/w17550

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