Foreign Direct Investment Strategies and Firms' Capabilities

This paper presents a simple model to analyse the impact of localised externalities on the internationalisation decision of firms. We argue that, once localised spillovers are taken into account, the standard predictions on the nature and direction of foreign direct investment (FDI) flows may bereversed. In the context of this model, the firm engaging in FDI does not necessarily enjoy a superior capability and the presence of spillovers ma y induce a firm to invest abroad even in the absence of exporting costs inorder to capture spatially bounded externalities. Conversely, firm's may refrain from investing abroad for fear of dissipation of their firm specific assets.