Determinants of FDI in Central and Eastern Europe by Hanna Makhavikova

Author:Hanna Makhavikova
Language: eng
Format: epub
ISBN: 9783319918785
Publisher: Springer International Publishing

(3.12)

The difference between exports and investments in countries with restrictive trade barriers is written as:

(3.13)

Here the sum of γj shows profits gained from tariff-jumping. This extension can be negative, which means that it is unreasonable to supply n-m countries with FDI or at all.

Equation (3.13) shows that with an increase in external trade tariffs the tariff-jumping gain becomes bigger. This confirms the hypothesis that protective trade barriers stimulate FDI in a country. This finding has an important practical implication. If the government aim is to attract more FDI into a country, it can impose higher trade barriers on imports.

In our analysis we also apply {t,f} space offered by Neary (2002) to our set-up of countries with different external trade barriers (Fig. 3.7). Xn region represents a situation when tn does not exceed and a firm i can export to all n countries. Xm is for the case when , the trade with only m countries is possible. The region Xn is bigger than region Xm by measure of υ(t).

Fig. 3.7Possible regimes with different external tariffs and no preferential trade agreements. Source: Author’s work. Note: Xn, Xm, and X1 are exports to n, m and 1 country correspondingly, Fn is FDI in all n countries, ∩, (Fn − mXm), and (Fm − 1X1) are mixed regimes where a firm i decides between exports and investment, O is the national strategy of a firm i

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