Question

Explain the proximity-concentration tradeoff in the context of horizontal foreign direct investment (FDI). If fixed cost amounts to $175,000,000 and per unit trade cost is equal to $250, determine the scale cutoff for output.

Answer 1

The proximity-concentration trade-off in the context of horizontal foreign direct investment (FDI) is that operating larger facilities near customers to reduce production costs versus breaking up and transferring parts of the production process to other countries to avoid the high trade costs associated with exporting.

Now if fixed cost amounts to $175,000,000 and per unit trade cost is equal to $250, determine the scale cutoff for output.

Then the scale cutoff for output is = $175,000,000/$250 = $ 700,000.