Export-Platform Foreign Direct Investment Karolina Ekholm Stockholm School of Economics and CEPR Rikard Forslid University of Stockholm and CEPR James R. Markusen University of Colorado, Boulder, NBER, CEPR Abstract A poorly-understood empirical phenomenon is export-platform affiliate production for sale in third countries rather than in the parent or host countries. Our model identifies conditions under which a firm in each of two large, high-income countries use a small, low-cost country solely as an export platform to serve the other high-income country but not the firm’s home market. A critical role for intermediate inputs is identified in supporting such an equilibrium. We then consider a free-trade area between one of the large, high-income countries and the small, low-cost country. For a range of parameters, the firm in the insider country may adopt a home-country export-platform strategy and the outsider firm a third-country export- platform strategy: e.g., both a US and European firm adopt a plant in Mexico solely to serve the US, and each maintains a plant in Europe to serve Europe. This particular outcome is interesting because it is the outsiderfirm which is the relative beneficiary of the free-trade area. Our empirical section emphasizes its relevance: US affiliates located inside a free-trade area concentrate their exports to other free-trade-area countries This version, May 17, 2005 JEL codes: F12, F23 Key words : Multinational firms , export pl atform, fore ign direc t inve stment, affiliate exports, free-trade area Corresponding author: James R. Markusen Department of Economics University of Colorado Boulder, CO 80309-0256 1-303-492-0748(voice) -8960 (fax) [email protected]