Trade,foreign direct investment or acquisition: Optimal entry modes for multinationals

We examine multinationals' optimal entry modes into foreign markets as a function of market size, FDI fixed costs, tariffs and transport costs. Our results highlight why large countries are more likely to attract acquisition investment, while intermediate sized countries may be served predominantly through trade, even in the presence of high tariffs. Small countries are most likely to experience either FDI or no entry. We also show how these results vary with the competition intensity in the host country.FDI fixed costs, tariffs and transport costs are crucial not only in determining whether to engage in FDI or trade, but they are also shown to influence the acquisition choice as trade and FDI threats influence the acquisition price. Finally, we explore the welfare implications of tariff reductions for both the local firm and the multinational and investigate political motives to impose endogenous tariffs that influence not only the welfare of a local firm, but also the entry mode of the multinational.     

FDI Policy,Greenfield Investment and Cross‐border Mergers

This paper examines a multinational's choice between greenfield investment and cross‐border merger when it enters another country via foreign direct investment (FDI) and faces the host country's FDI policy. Greenfield investment incurs a fixed plant setup cost, whereas the foreign firm obtains only a share of the joint profit from a cross‐border merger under the restriction of the FDI policy. This trade‐off is affected by market demand, cost differential, and market competition, among other things. The host country's government chooses its FDI policy to affect (or alter) the multinational's entry mode to achieve the maximum social welfare for the domestic country. We characterize the conditions shaping the optimal FDI policy and offer intuitions on FDI patterns in developing and developed countries.     

Tax competition for foreign direct investments and the nature of the incumbent firm

We investigate tax/subsidy competition for foreign direct investments (FDI) between countries of different size when a domestic firm is the incumbent in the largest market and we study how the nature (public or private) of the incumbent firm affects policy competition. We show that, differently from the case of a private firm, the country hosting the incumbent always benefits from FDI if the domestic firm is a public welfare‐maximizing firm. We also show that the public firm acts as a disciplinary device for the foreign multinational that will always choose the efficient welfare‐maximizing location. An efficiency‐enhancing role of policy competition may then arise only when the domestic incumbent is a private firm, whereas tax competition is always wasteful in the presence of a public firm.     

Should Governments Subsidise Inward Foreign Direct Investment?

What happens when a government has incentives to subsidise inward FDI when labour markets are imperfectly competitive? Contrary to the traditional assumption in the literature, we allow the production in the multinational firm to either complement or substitute for local production. A new result is that the wage in the host country may decrease when production is moved to this country. The reason is that the union in the host country internalises product market externalities between the firms. Furthermore, it is shown that when a single country subsidises inward FDI, total world welfare might increase.     

Market Size,Local Sourcing and Policy Competition for Foreign Direct Investment

This paper analyzes policy competition for a foreign‐owned monopolist firm between two asymmetric countries. In particular, one country has a larger economy than the other country. At the same time, the small country produces an intermediate good for the final good production, while the large country does not. We show that whether a country will win foreign direct investment (FDI) competition is determined by the interaction between relative transport costs of intermediate and final goods and the market size of the large country relative to that of the small country; and policy competition for FDI may Pareto weakly improve national welfare of the competing countries.     

Location choice,competition, and welfare in non-tradable service FDI

We investigate whether non-tradable service FDI is efficient from a welfare point of view. A fixed number of firms strategically decide which markets to locate in and then compete in quasi-Cournot fashion. Considering firm location in two symmetric markets, non-tradable service FDI may or may not be efficient for the source country, depending on the total number of firms, competition in markets and the curvature of the demand function. In contrast, non-tradable service FDI is always efficient for the host country and the overall economy. This implies that any policy that affects firm location between two symmetric markets will not be beneficial from a welfare viewpoint.     

Tax Policy When Countries Compete for Third Market Exports

We examine the welfare and other consequences of tax policy in a third market export model where duopolists located in two countries compete in prices. With tax competition between governments, we allow for welfare‐maximizing governments in the two countries to delegate tax setting responsibility to policy‐makers who have different objectives than the governments. The unique equilibrium in the tax competition environment involves both governments delegating tax setting responsibility to tax revenue‐maximizing policy‐makers. This equilibrium yields higher welfare for both countries than the outcome when the governments delegate to welfare‐maximizing policy‐makers. The paper also compares tax competition with tax harmonization and shows that when the entire export market is served, tax harmonization improves the welfare of the country that houses the low cost firm, while the other country may be immiserized.     

Measurement and Modeling of the Economic Effects of Trade and Investment Barriers in Services

In this paper, the authors adapt the latest version of the Michigan Model of World Production and Trade to incorporate cross-border services trade and foreign direct investment (FDI). Firms are taken to be monopolistically competitive. Each firm produces products differentiated by the original R&D that defines the basic product and by location of production. Each firm faces a fixed cost in the country where production occurs, and sets an optimal mark-up for sales from each location. Firms locate production for export or for local consumption depending on the type of barriers faced. Barriers to trade in services take the form of an additional cost of employing variable capital and labor. The paper reports the impact on welfare, trade, factor prices, sectoral output, economies of scale, and activities of multinationals following the introduction of national treatment of multinational firms in all countries.     

Equity Control of Multinational Firms: Effects on Resource Allocation and National Welfare

In this paper, we re-examine the effects of equity control of multinational firms on resource allocation and national welfare in a model with rural–urban migration and urban unemployment. A large number of recipient (host) countries are developing countries with dual economies. We indicate, among other things, that a restriction on multinational investment may lower the unemployment rate and increase the total employment in the host country. Furthermore, we find that the restriction on multinational investment raises the national welfare in the host economy if the tariff imposed on imports is sufficiently large and the difference between domestic and foreign capital rental is sufficiently small.     

The impacts of PTA formation on small economies’ tax competition for FDI inflows

This paper examines why small economies are so eager to form or join preferential trade agreements (PTAs), as observed in the East Asia and the Central Europe, taking consideration of the strategic impacts of PTA formation on tax competition for foreign direct investment (FDI) inflows. Based on a simple model where three asymmetric countries compete for FDI inflows, we demonstrate that PTA formation provides a strategic advantage to a small member country of PTA in competing for FDI inflows not only with respect to a non-member country but with a large member country when the integrated market size is large enough. In addition, it is shown that it might be an out-of-equilibrium path strategy for a non-member small economy to exert efforts to induce FDI inflows, because the excessive subsidies to induce FDI inflows might outweigh the gains from the FDI inflows due to strategic disadvantage in tax competition after PTA formation. These findings explain why small economies are mainly driven by the expected economic benefits including FDI inflows from joining PTA.     

Power in the multinational corporation in industry equilibrium

Recent theories of the multinational corporation introduce the property rights model of the firm and examine whether to integrate or outsource firm activities locally or to a foreign country. This paper focuses instead on the internal organization of the multinational corporation by examining the power allocation between headquarters and subsidiaries. We provide a framework to analyse the interaction between the decision to serve the local market by exporting or FDI, market access and the optimal mode of organization of the multinational corporation. We find that subsidiary managers are given decision power to run the firm at intermediate levels of host country competition. We then provide comparative statics on the optimal organization of the multinational corporation for changes in fixed FDI entry costs, trade costs, as well as changes in information technology.      

Profit taxation and the mode of foreign market entry

Abstract This paper studies the role of profit taxation for an international firm's decision upon how to penetrate a foreign market – through exports or through foreign direct investment (FDI) and local supply. We show that with harmonized taxes the international firm may choose FDI even though this has welfare costs from a global point of view. With tax competition, the host country can enforce exporting instead of FDI. This leads to a Nash equilibrium associated with higher world welfare than harmonized taxes. Thus, because of the effect on entry mode, tax competition provides heretofore unexplored benefits as compared to tax harmonization.     

Foreign direct investment,input prices,and host country welfare

This paper analyzes a multinational firm’s foreign direct investment decision, through either greenfield investment or cross‐border merger and acquisition, into a host country with an input monopoly that adopts either uniform pricing or discriminatory pricing. The optimal foreign entry mode could differ under each pricing policy. Under Cournot competition, firms’ technological gap and the initial local market structure are critical to the choice of foreign entry mode, whereas product substitutability is important under Bertrand competition. In the presence of foreign entry, this paper also examines the welfare effects of input price discrimination for the host country.     

Brotherhood of competition: Foreign Direct Investment and domestic mergers

We examine the effects of mergers on Foreign Direct Investment (FDI), and on shaping national policies regarding FDI. In this work we develop a partial equilibrium model of an oligopolistic industry in which a number of domestic and foreign firms compete in the market for a homogeneous good in a host country. It is assumed that the number of foreign firms is endogenous and can be affected by the government policy in the host country. The government sets the policy (subsidies) to maximise social welfare. We allow domestic mergers. Our main results suggest that when the host country government imposes discriminatory lump-sum subsidy in favor of foreign firms, a merger of domestic firms will increase the number of FDI if the subsidy level is exogenous. With an endogenous level of subsidy, a merger of domestic firms will decrease (increase) the welfare if the domestic firms are more (less) efficient.     

外商直接投资、知识产权保护与发展中国家的社会福利--兼论发展中国家的引资战略

本文在一个由发达国家企业和发展中国家企业所构成的寡头垄断的产量竞争模型中 ,考察了在发达国家企业所进行的产品创新型R&D投资具有溢出效应的情况下 ,发达国家企业对发展中国家的外商直接投资 (FDI)所产生的福利效果。本文发现 ,即使发展中国家拥有生产成本相对低廉的优势 ,发达国家企业对发展中国家的FDI也只有在溢出效应较小时才可能发生。但这种情况下的FDI也可能损害发展中国家的同类竞争企业 ,甚至损害发展中国家的社会福利。当然 ,以上结论并不意味着引进外资必然损害发展中国家的利益 ,外资引进对发展中国家所产生的福利效果 ,在很大程度上取决于FDI的性质 (产品市场的所在国 )、发展中国家成本优势的大小以及它对知识产权的保护力度等因素。     

WHO GAINS FROM WHOM? SPILLOVERS,COMPETITION AND TECHNOLOGY SOURCING IN THE FOREIGN‐OWNED SECTOR OF UK MANUFACTURING

There is a growing literature explaining foreign direct investment flows in terms of ‘technology sourcing’, whereby multinational firms invest in certain locations not to exploit their firm‐specific assets in the host environment, but to access technology that is generated by host country firms. However, it is far from clear whether the literature has found significant evidence of such activity beyond a few isolated examples. This paper extends this work by allowing for the possibility of multinational enterprises (MNEs) sourcing technology not only from host country firms but also from each other within a host economy. The paper demonstrates that MNEs in the UK do indeed appropriate spillovers both from indigenous firms and from other foreign investors, but that there are also significant competition effects that act to reduce productivity in certain industries. The paper also explores which countries' affiliates gain most from technology sourcing in the UK, and which generate the greatest spillovers within the foreign‐owned sector.     

Pollution Haven with Technological Externalities Arising from Foreign Direct Investment

This paper presents a two-stage game, in which in the first stage two multinational firms (MNFs) seeking pollution havens choose a location, that is, whether to export to or undertake FDI in the host country, and in the second stage, these two MNFs and a firm in the host country play a Cournot game. The MNFs’ location decisions are influenced by the fixed cost of FDI, the spillover of technologies to a foreign firm, and pollution emission standards in the host and home countries. There exist multiple equilibria in the location pattern because of the technology spillover accompanied by FDI. In addition, the analysis leads to the possibility of an equilibrium based on the Prisoners’ Dilemma. When the host country relaxes emission standards, the MNFs choose FDI, although their profits are higher if both choose to export instead. This provides a rationale for the FDI source country’s intervention to restrict the MNFs’ FDI according to the level of environmental regulation in the host country.     

Foreign direct investment subsidy in a dynamic stochastic general equilibrium model with heterogeneous firms

This study analyzes the macroeconomic impacts of subsidies to attract multinational corporations when firms are determining whether to enter or how to serve foreign markets. We show that a small FDI subsidy scheme induces consumption gains and delivers short‐term welfare improvement for the FDI host country if firms differ in productivity. However, the subsidy generates a new problem and results in the wealth reallocation effect, leading to welfare deterioration for the host country in the long run. Moreover, we find that a subsidy program induces a welfare improvement for the host country if it is offered to all domestic producers instead of foreign producers only in the host country.     

Is tied aid bad for the recipient countries?

This paper examines the welfare effects of the exclusivity of foreign aid taking consideration of donor countries' strategic and self-interested economic motivations. Based on an oligopolistic model with strategic interactions between firms and governments providing foreign aid, we demonstrate that a higher exclusivity of foreign aid, taking the form of tied aid, increases the equilibrium amount of aid and the social welfare of the recipient country when the foreign aid policies are decided in a non-cooperative fashion between donor countries. However, when donor countries coordinate aid policies to maximize joint-welfare including recipient country's welfare, the lower exclusivity of foreign aid, taking the form of untied aid, will increase the equilibrium amount of aid and the global social welfare. The results implicate that when a credible enforcement mechanism for the cooperative regime for foreign aid is not available, tied aid is welfare dominant policy for both donor and recipient countries than untied aid.