Date Added: Dec 2010
In the literature on exports and investment, most productive firms are seen to invest abroad. In the Helpman et al. (2004) model, costs of transportation play a critical role in the decision about whether to serve foreign customers by exporting, or by producing abroad. The authors consider the case of tradable services, where the marginal cost of transport is near zero. The authors argue that in the purchase of services, buyers face uncertainty about product quality, especially when production is located far away. Firm optimization then leads less productive firms to self-select themselves for FDI. They test this prediction with data from the Indian software industry and find support for it.