Publication Type

Working Paper

Publication Date

2006

Abstract

We extend Antrµas and Helpman (2004) on ¯rm heterogeneity and organizational choice to a dynamic setting with FDI uncertainty, in which the probability of investment failure decreases with the host country's infrastructure level and increases with the technological complexity facing each ¯rm. Moreover, it decreases over time as the accumulated mass of ¯rms succeeding in FDI increases. We show that a minimum level of infrastructure is required to trigger a ¯rst wave of industrial migration. We then formalize the often noted \magnet e®ect of FDI{the ¯rst wave of industrial migration generates positive externality (information spillover) for subsequent investors, which stimulates a second wave of industrial migration. The process continues until the power of the \magnet reaches its steady-state level. In contrast with the predictions in Antrµas and Helpman (2004), we show that ¯rms with intermediate productivity levels are the ones migrate ¯rst, while the most productive and the least productive ¯rms tend to stay behind. This non-monotonic relationship between ¯rms' productivity and their FDI propensities is consistent with the patterns of Taiwanese ¯rms undertaking FDI in China.

Discipline

Finance | Growth and Development

Research Areas

International Economics

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

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