Advantages Of Proximity Concentration Tradeoff

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Going abroad, firms select between opening a foreign branch, which allows them to be proximate to their consumers, and exporting, which is associated with variable trade costs but avoids duplication costs. This so-called proximity-concentration tradeoff is extensively discussed in the trade literature. In line with the empirical evidence for the manufacturing sector, a seminal paper by \cite{helpman2004} finds that only the most productive firms conduct foreign direct investment (FDI), while less productive firms serve foreign markets via exports.\footnote{For the manufacturing sector in Germany, \cite{happyfew} find that relative to exporters, multinationals are substantially larger, more productive, pay higher wages and generate higher value…show more content…
In our analysis, we also consider IT consulting and administrative and support service activities.} only the most productive firms export their services, while less productive firms opt for FDI.\footnote{According to the General Agreement in Trade in Services, there are four possible modes to trade services abroad. A transaction can occur without a physical movement of a consumer or a service provider to a location of the other (mode 1); a consumer can receive the service in the country of a service supplier, which would be specified under the mode 2; finally, a service provider can temporarily move to the location of its foreign buyer (mode 4) or establish a branch there (mode 3). The statistical data on services trade for German firms further aggregates these modes and classify modes 1, 2 and 4 as

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