Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/72331
Authors: 
Neary, James Peter
Year of Publication: 
2005
Series/Report no.: 
Working Paper Series, UCD Centre for Economic Research 05/12
Abstract: 
This paper reviews the theory of foreign direct investment (FDI), focusing on an apparent con‡ict between theory and recent trends in the globalized world. The bulk of FDI is horizontal rather than vertical, but horizontal FDI is discouraged when trade costs fall. This seems to conflict with the experience of the 1990s, when trade liberalisation and technological change led to dramatic reductions in trade costs yet FDI grew much faster than trade. Two possible resolutions to this paradox are explored. First, horizontal FDI in trading blocs is encouraged by intra-bloc trade liberalisation, because foreign …rms establish plants in one country as export platforms to serve the bloc as a whole. Second, cross-border mergers, which are quantitatively more important than green…eld FDI, are encouraged rather than discouraged by falling trade costs.
Subjects: 
Cross-border mergers and acquisitions
Export platform FDI
Foreign direct investment
International trade policy
Trade liberalisation
JEL: 
F13
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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