Effects of Preferences on Foreign Direct Investment

Abstract

The previous chapter concerned the impact of preferences on trade, but without considering the mechanism relating the two. Ex post the relationship depends simply on elasticity of export supply — how responsive exports are to the change in the prices received by exporters after the introduction of preferences. Some countries responded very little to preferences; for various reasons, export supply was fairly inelastic in Turkey, Egypt, Morocco, the Lebanon and elsewhere in the 1970s. What is surprising, however, is that export supply turned out to be elastic not only in the semi-industrialised countries (namely Greece, Israel, Spain) but also in some relatively less-developed countries (such as Tunisia and Malta) where a smaller response to price might have been expected. The reason lies in the openness of the latter countries to foreign investment, which enabled them to overcome critical bottlenecks and so increased their elasticity of export supply.