This article analyses the trade-off relationship between exports and horizontal foreign direct investment (FDI) in response to a mutual recognition agreement (MRA) for technical regulations and certification procedures for import goods. As an MRA is concluded to reduce entry costs of exporting, multinationals (MNEs) derive more benefits from economies of scale than from tariff-jumping strategies, implying that they have more incentive to export than to perform horizontal FDI. In order to prove the above argument, the article introduces MRA and FDI into Helpman, Melitz andYeaple (2004)'s framework of international trade, analyses the relationship between exports and horizontal FDI sales in response to MRA and then tests empirically the theoretical results, utilizing data from US multinational affiliate sales and exports. The empirical results show that MRAs have positive effects on the US exports relative to horizontal FDI, bringing the results in line with the theoretical model.
Journal of World Trade