The Proximity-Concentration Trade-off with Multi-product Firms : Are Exports and FDI Complements or Substitutes?

Standard horizontal FDI models predict substitutability between FDI and exports in light of the proximity-concentration trade-off, nonetheless, empirical literature finds, almost invariably, a complementarity effect. We argue that given the multi-product nature of the vast majority of firms, FDI and exports can coexist even at the level of the firm. We use detailed French firm-level data over 2002 and 2009 to show that the question of whether FDI and exports are complements or substitutes depends on whether the product belongs to the core competency of the firm and the demand in the destination market. We provide new evidence on the substitutability relation between FDI and exports, which takes place in the best performing products of the firm and in high demand markets when the size of the investment is sufficiently high. In turn, foreign presence generates "proximity advantages" which generates exports of products further away of the firms' core competency