The Role Of Trade Cost In FDI Strategy In Heterogeneous Firms

This paper attempts to clarify the reasons for the rapid growth of FDI in developing countries, particularly East Asian countries, compared with that of FDI to developed countries. To do this, the authors will examine the mechanics of HFDI and VFDI, in order to shed light on the role of trade costs. This empirical analysis by estimation of a multinomial logic model of Japanese firms' FDI choices reveals that the reduction of trade costs between host and home countries attracts even less productive VFDI firms. In contrast, it does not attract HFDI firms. Since developing