Export-Platform Foreign Direct Investment

Abstract

An interesting empirical phenomenon is export-platform foreign-direct investment, particularly affiliate production for sale in third countries rather than in the parent or host countries. This is rather poorly understood because our theoretical understanding of multinationals is largely derived from two-country models. Our model shows how affiliate production solely for third countries can occur when a firm in each of two large, high-income countries has a domestic plant to serve its own market, and uses a plant in a small, low-cost country to serve the other highincome country. Third-country export-platform FDI can also occur when the host and third countries are inside a free-trade area and the parent is outside. Our empirical section shows that US affiliates located inside a free-trade area concentrate their exports to other free-trade member countries, consistent with parameterizations of our model in which the outside firm is the chief beneficiary of the free-trade area. Affiliates located outside of free-trade areas such as those in Southeast Asia show a balance between exports to the parent and exports to third countries, consistent with parameterizations that generate “global export-platform” production. Classification-Multinational firms, export platform, foreign direct investment, affiliate exports, free-trade area