"Proximity-Concentration" With Heterogeneous Firms: Theory And Empirics

There are two alternative modes of foreign market penetration. One is exporting with concentrating domestic production. The other is foreign direct investment with proximity foreign market. Which mode is more preferable? What factors might effect the selection of the two modes? Brainard (1997) "Proximity-Concentration" mainly demonstrated the above questions. Her conclusion is that: When transport costs or tariff barriers are higher, plant-level fixed costs compared to the firm-level fixed costs lower, FDI will be more prevalent. In contrast, exporting will be more prevalent. Markusen and Venables (1998, 2000) brought the differences of market scale and elements prices in different countries into the "Proximity-Concentration" mode, and drew the conclusions which are larger foreign markets will attract more FDI; while the elements price difference between the two countries is smaller, FDI is likely to become more prevalent.However, the conclusions above are based on the assumption of firms homogeneity, which would derive out a conjecture. It is that all of the firms in an industry select export or all firms select FDI, which is inconsistent with the truth of experience. To solve this problem, it is necessary to introduce the theory of heterogeneous enterprises. Helpman et al (2004) introduced Melitz (2003) heterogeneity of the enterprise into the "Proximity-Concentration" theory. Helpman et al (2004) came to the conclusion: among the existing enterprises, enterprises with the lowest productivity can only sale in the domestic market; enterprise with higher productivity can not only sale in domestic market, but also export to foreign markets; and the enterprise with the highest productivity can not only sale in domestic market, but also penetrate into foreign markets through FDI. Helpman et al (2004) also pointed out that in the sector whose difference in enterprises' productivity is larger, FDI will become more popular.This article first systematically combs out the evolution of the development of "Proximity-Concentration" issue and makes effective integration. Based on the comprehensive summary of the influencing factors of "Proximity-Concentration" issue, the paper sets up a more comprehensive model, compared to the modes of Brainard (1997) and Helpman et al (2004), and re-tests the influencing factors of "Proximity-Concentration" issue by applying the more recent American BEA 2004 statistical data. The empirical results show that the theoretical results are supported by empirical data except the difference of elements prices whose empirical result isn't significant.