Media Briefings

Foreign Direct Investment Versus Exports: How Multinational Firms Decide On The Ideal Production Strategy For Overseas Markets

  • Published Date: October 2009

Should multinational firms looking to sell into an overseas market do so by exporting
goods to that country or by foreign direct investment, building a factory in the target
country and selling the output there? Research by Arijit Mukherjee, published in the
October 2009 issue of the Economic Journal, suggests that when the firm faces
labour unions, it should enter the market by both exporting and foreign direct
The study suggests that exports and foreign direct investment are not necessarily
substitutes, and that different markets require a different mix of exports and foreign
direct investment.
A monopolist multinational may be better off by both exporting and undertaking
foreign direct investment if the product market is large enough.
Competition in the product market reduces the multinational’s incentive for serving
the product market through both exporting and foreign direct investment. But if the
product market is neither very small nor very large, a combination is the best option.
The driver of these results is the presence of trade unions. If the labour market is
unionised, the multinational firm may need to consider the effect on wages caused
by its choice of plant location.
Operating multiple plants helps the multinational to ‘soften’ the effect on wages and
hence it benefits from operating multiple plants. For example, if the production level
affects only the wage rate in the foreign market, a certain amount of exporting to the
foreign market helps to reduce the wage rate in the foreign country.
Hence, the trade-off between the cost of exporting and the benefit of wage reduction
determines the best production strategy of the multinational.
Notes for Editors: ‘Unionised Labour Market and Strategic Production Decision of a
Multinational’ by Arijit Mukherjee is published in the October 2008 issue of the
Economic Journal.
Arijit Mukherjee is at the University of Nottingham.
For Further Information: contact Arijit Mukherjee on 0115 951 4733 (email:; or Romesh Vaitilingam on 07768-661095