The Influence Of Transportation Costs,Wages,and Market Size On FDI In Heterogeneous Developing Countries

This paper investigates the impact of transportation costs on decisions made by multinational enterprises in different industries and headquartered in higher-income,developed economies concerning where and how to invest in heterogeneous lower-income,developing economies.To do so,this paper develops a theoretical,North-South model of FDI that includes one northern country and two different southern countries.The model includes two inputs(skilled labor and unskilled labor),two stages of production,iceberg transportation costs for both stages,and heterogenous firms.Firms can choose any combination of the three countries for either stage of production.This paper then systematically analyzes the model to determine the profit-maximizing investment strategies for firms of varying productivity levels in a range of industries and under different levels of transportation costs.The model shows how a wide array of investment patterns can exist simultaneously for different firms under various levels of transportation cost,and that these patterns vary across industries.