The proximity-concentration trade-off for foreign direct investment concerns the
ID: 1105314 • Letter: T
Question
The proximity-concentration trade-off for foreign direct investment concerns the trade-off between
A.
locating production near customers to avoid the high trade costs associated with exporting versus breaking up and transferring parts of the production process to other countries.
B.
operating larger facilities near customers to reduce production costs versus breaking up and transferring parts of the production process to other countries to avoid the high trade costs associated with exporting.
C.
locating production near customers to avoid the high trade costs associated with exporting versus operating larger facilities and exporting more to take advantage of increasing returns to scale in production.
D.
breaking up and transferring parts of the production process to other countries to reduce production costs versus operating larger facilities to take advantage of increasing returns to scale in production.
Explanation / Answer
The proximity-concentration trade-off for foreign direct investment concerns the trade-off between
Ans. c) locating production near customers to avoid the high trade costs associated with exporting versus operating larger facilities and exporting more to take advantage of increasing returns to scale in production.
The conventional proximity-concentration theory suggests that FDI substitutes for trade if the distance between the countries is large while there is more of production and exports if there is increasing returns toscale in production.
Thus,the correct answer is C) locating production near customers to avoid the high trade costs associated with exporting versus operating larger facilities and exporting more to take advantage of increasing returns to scale in production.
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