Fixed Costs in Exporting and Investing

This study quantifies the fixed costs of export and outward foreign direct investment (FDI). Specifically, we compute the ratio of fixed costs for FDI to those for exports, which is called the "fixed cost ratio" (FCR). To do so, we solve an equation derived from the theoretical model of the choice between exporting and FDI. We apply this method to exports and FDI from Japan to 68 countries during the period 2002-2018. Our findings can be summarized as follows: In terms of median values, the FCR is estimated to be approximately 10, indicating that the fixed costs for FDI are approximately 10 times higher than those for exports. Furthermore, our regression analyses on the determinants of the FCR show a significantly negative effect of regional trade agreements (RTAs) on the FCR, which indicates that RTAs contribute to reducing fixed costs of FDI more greatly than those of exporting. This result has important implications for the RTAs' trade creation effect. Finally, we conduct simulation analyses of the effect of RTAs on the ratio of exports to FDI sales.