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The effects of technological asymmetries on strategic foreign direct investment location

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Abstract

We consider the plant location decision of a multinational, which can invest in a more or a less technologically advanced country. We find that in the absence of exporting by the local firms, the multinational will invest in the country lagging behind, unless the firm in that country is unable to compete in the product market. Exporting by the local firms reduces (increases) the multinational's incentive to invest in the country lagging behind if the technological gap between the two is small (large). Our model's predictions are consistent with the trends of FDI inflows observed over the last two decades in Europe.

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