Trade Restrictions
Trade Restrictions
We have shown that for various reasons there are numerous ways in which
a government can make it impractical for a firm to reach its market potential
through exportation alone. The firm may find that it must produce in a foreign
country if it is to sell there. For example, Mexico announced that within five
years locally produced microcomputers would have to comprise 70 percent
of the market- Although many producers questioned whether the same prices
and quality could be maintained as when they exported, they nevertheless
were reluctant to abandon a growing market.13 Such governmental pronouncements are not unusual. They undoubtedly favor large companies that can afford to commit large amounts of resources abroad and make foreign competitiveness more difficult for the smaller firms, which can afford only exportation as a means of serving foreign markets.
How prevalent are trade restrictions as an enticement for making direct investments? There is substantial anecdotal evidence of firms' decisions to locate within protected markets, yet studies of aggregate direct investment movements are inconclusive regarding the importance of trade barriers.14 A possible explanation for the fact that some studies have not found import barriers to be an important enticement is that the studies have had to rely on
actual tariff barriers as the measure of restrictions. This reliance overlooks the importance of nontariff constraints, indirect entry barriers, and potential trade restrictions. In the opening case, Bridgestone reacted to these latter impediments to trade rather than to the actual existence of tariffs on tires. Almost certainly import barriers are a major enticement to direct investment, but they must be viewed alongside other factors, such as the market size of the country imposing barriers.
For example, import trade restrictions have been highly influential in enticing automobile producers to locate in Mexico. Similar restrictions by Central American countries have been ineffective because of their small markets. However, Central American import barriers on products requiring lower amounts of capital investment and therefore smaller markets (e.g., pharmaceuticals) have been highly effective at enticing direct investment.
We have shown that for various reasons there are numerous ways in which
a government can make it impractical for a firm to reach its market potential
through exportation alone. The firm may find that it must produce in a foreign
country if it is to sell there. For example, Mexico announced that within five
years locally produced microcomputers would have to comprise 70 percent
of the market- Although many producers questioned whether the same prices
and quality could be maintained as when they exported, they nevertheless
were reluctant to abandon a growing market.13 Such governmental pronouncements are not unusual. They undoubtedly favor large companies that can afford to commit large amounts of resources abroad and make foreign competitiveness more difficult for the smaller firms, which can afford only exportation as a means of serving foreign markets.
How prevalent are trade restrictions as an enticement for making direct investments? There is substantial anecdotal evidence of firms' decisions to locate within protected markets, yet studies of aggregate direct investment movements are inconclusive regarding the importance of trade barriers.14 A possible explanation for the fact that some studies have not found import barriers to be an important enticement is that the studies have had to rely on
actual tariff barriers as the measure of restrictions. This reliance overlooks the importance of nontariff constraints, indirect entry barriers, and potential trade restrictions. In the opening case, Bridgestone reacted to these latter impediments to trade rather than to the actual existence of tariffs on tires. Almost certainly import barriers are a major enticement to direct investment, but they must be viewed alongside other factors, such as the market size of the country imposing barriers.
For example, import trade restrictions have been highly influential in enticing automobile producers to locate in Mexico. Similar restrictions by Central American countries have been ineffective because of their small markets. However, Central American import barriers on products requiring lower amounts of capital investment and therefore smaller markets (e.g., pharmaceuticals) have been highly effective at enticing direct investment.
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