Foreign direct investment under monopolistic competition: Empirical Evidence
A number of papers have conducted empirical investigations of the hypotheses outlined above. An early and influential study by Brainard (1997) looks at the exports and affiliate sales of U.S.-based firms to 27 countries and in 63 industries. Trade costs are measured by freight and insurance charges and by import tariffs. Plant scale economies are proxied by plant-level employment, and firm-level scale economies by total nonproduction workers (capturing headquarters activities). Industry measures of R&D and advertising intensity are used to capture internalization advantages. Brainard finds that the share of affiliate sales in total foreign sales (affiliate sales plus exports) increases with trade barriers, transportation costs, and firmlevel scale economies, and decreases with plant-scale economies, offering support to the predictions of the monopolistic competitionmodel.Helpman, Melitz, and Yeaple (2004) undertake a similar exercise, with an extended data set and including ameasure of the dispersion of firm size (and thereby dispersion of operating costs). Their results confirm those of Brainard, and additionally they find that dispersion has a negative effect on exports relative to affiliate sales, consistent with the predictions of their model of FDI with heterogeneous firms.