Export Versus FDI and the Communication of Complex Information

Traditional proximity-concentration models of the decision to serve foreign markets through exports or FDI sales tend to overemphasize physical transport costs and market size while underemphasizing the cost of transmitting information. I augment those models with the importance of interacting with customers and communicating complex information within firms and use these characteristics to predict the location of production. Goods and services requiring direct communication with consumers are more likely to be produced in the destination market. Activities requiring complex within firm communication are more likely to occur at the multinational's headquarters for export, especially when the destination market has weak institutions. These predictions are tested using firm-level data from the Bureau of Economic Analysis US Direct Investment Abroad Benchmark Survey of Multinationals combined with task-level data from the Department of Labor's Occupational Information Network. The approach developed in this paper performs well for both manufacturing and service industries and is robust to a variety of specifications. (C) 2011 Elsevier B.V. All rights reserved.