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The proximity-concentration tradeoff under uncertainty

Author

Listed:
  • Ramondo, Natalia
  • Rappoport, Veronica
  • Ruhl, Kim J.

Abstract

In this article, we analyse the firm's choice between serving a foreign market through exports or through foreign affiliate sales in an environment characterized by country-specific shocks to the cost of production. Our model predicts that country pairs with less-correlated output fluctuations trade more, relative to affiliate sales, whereas countries with more-volatile fluctuations are served relatively more by exporters than by foreign affiliates selling abroad. Using detailed data on trade and affiliate sales, we find empirical support for our model's predictions.

Suggested Citation

  • Ramondo, Natalia & Rappoport, Veronica & Ruhl, Kim J., 2013. "The proximity-concentration tradeoff under uncertainty," LSE Research Online Documents on Economics 54268, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:54268
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    File URL: http://eprints.lse.ac.uk/54268/
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    Keywords

    proximity-concentration; multinational firms; foreign direct investment; international trade; uncertainty;
    All these keywords.

    JEL classification:

    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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