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A political economy perspective on horizontal FDI in a dynamic Cournot-oligopoly with endogenous entry
Affiliation:1. Universität Trier, IAAEU (Institut für Arbeitsrecht und Arbeitsbeziehungen in der Europäischen Union), Campus II, D-54286, Trier, Germany;2. IZA, Bonn, Germany;3. CESifo, München, Germany
Abstract:Entry in a homogeneous Cournot-oligopoly is excessive if and only if there is business-stealing (Amir et al., 2014). The excessive entry prediction has been derived primarily for closed economies and using a welfarist benchmark. We extend this framework and allow for (1) horizontal FDI in a multi-period setting and (2) interest group-based government behaviour. Opening the market to greenfield investments from abroad tends to aggravate the entry distortion. Moreover, market opening may reduce welfare if a more pronounced entry distortion dominates the gain in consumer surplus. Finally, a government, which places sufficiently little weight on the interests of consumers, will object to market opening, even if welfare rises.
Keywords:Excessive entry  Cournot-oligopoly  Horizontal FDI  Political support function  JEL  D 43  D 72  F 21  L 13
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