Welfare, home market effects, and horizontal foreign direct investment

Abstract.  We investigate the spatial distribution and organization of an imperfectly competitive industry when firms may choose to operate more than a single production unit. Focusing on a short-run setting with a fixed mass of firms, we first fully characterize the spatial equilibria analytically. Comparing the equilibrium and the first-best, we secondly show that both organizational and spatial inefficiencies may arise. In particular, when fixed costs are low, when transport costs are high, and when products are close substitutes, the market outcome may well have to too many multinationals operating from a social point of view ('over-investment'). As a by-product, under-agglomeration of exporters in the larger market may arise.     

Trade costs, wage rates, technologies, and reverse imports

Abstract .  This paper explores the effects of transport costs, tariffs, and foreign wage rates on the domestic economy in the presence of reverse imports, with special emphasis on inter-firm cost asymmetry in an international oligopoly model. To serve the domestic market, a foreign firm produces in the foreign country, while two domestic firms produce either at home or abroad. Surprisingly, an increase in the foreign wage rate may increase the profits of a firm producing in the foreign country. Even if all firms produce in the foreign country, an increase in the foreign wage rate may improve domestic welfare.     

STAY OR LEAVE? CHOICE OF PLANT LOCATION WITH COST HETEROGENEITY

Using a two-country model, we examine location choices by two domestic firms when they serve only the domestic market and their cost structures differ. The findings indicate that whether the firm that has a greater incentive for foreign direct investment is more or less efficient depends on the differences in domestic and foreign marginal costs, trade costs, and the presence of fixed costs. Plant locations may not be uniquely determined. In particular, a small change in trade costs may reverse plant location. Moreover, a decrease in transport costs in the presence of foreign direct investment may deteriorate domestic welfare.     

Agglomeration and fair wages

Abstract.  This paper implements a fair wage constraint into an analytically tractable core-periphery agglomeration model. This enables us to study the role of imperfect labour markets for the pattern of agglomeration. In the short run, a marginal increase in fair wage preferences leads to an unambiguous compression of the national factor price differential between skilled and unskilled labour, involving an increase in the unemployment rate of unskilled workers. In the long run, this mechanism renders full dispersion of an unstable equilibrium already at higher trade costs than in perfect labour markets. There is a tendency for fair wage preferences to enforce agglomeration.     

Economic integration and the profitability of cross-border mergers and acquisitions

The 1990s was a decade of increased economic integration. The decade also witnessed a sharp increase in cross-border mergers and acquisitions. From a theoretical perspective, the increase in international mergers in more integrated economies is rather puzzling. It is a well-established result that due to the “business stealing effect”, mergers in integrated markets are not likely to be profitable. A reasonable conjecture would therefore be that closer integration of markets would reduce the attractiveness of cross-border mergers and acquisitions. The present paper demonstrates that this is not necessarily the case: Economic integration may trigger cross-border acquisitions by reducing the business stealing effect and by reducing the reservation price of the target firm. The paper thus provides explanations to the observed increase in cross-border mergers in a world of more integrated economies.     

Export‐supporting FDI

A large fraction of affiliates owned by multinational manufacturing companies operate in the wholesale and retail sectors. This paper proposes a model of trade, horizontal FDI, and export‐supporting FDI (ESFDI). ESFDI reduces distribution costs abroad, while production remains at home. ESFDI introduces a complementarity between trade and FDI, while trade and production abroad remain substitutes. German firm‐level FDI data show that ESFDI is quantitatively relevant. In line with the model, most firms choose either ESFDI or horizontal FDI in a given market; ESFDI is chosen by smaller parents and is strongest when distance from Germany is low.     

On the welfare effects of trade and investment liberalization

Using a three-factor knowledge- and physical capital model of trade and multinational activity, we consider a set of policy experiments to assess the welfare effects of trade and investment liberalization in general equilibrium. Specifically, we address the question of whether and under which circumstances a single versus a combined trade/investment liberalization strategy or a unilateral versus a bilateral policy change is preferable from a single country's and the world's point of view. The focus of this paper is to look at three relevant questions. First, when is investment liberalization beneficial and when is it harmful for a single economy or the whole world? Second, is pure investment liberalization a welfare maximizing strategy? Third, when is either kind of liberalization (trade, investment, or both) welfare improving and when neither of them?     

AN OLIGOPOLISTIC HECKSCHER–OHLIN MODEL OF FOREIGN DIRECT INVESTMENT*

We develop a 2 × 2 × 2 trade model in which one of the two sectors is perfectly competitive and the other is oligopolistic. The oligopoly sector consists of a given number of identical firms for each country, but they are free to locate in either country. The allocation of the firms between the two countries is endogenously determined, and changes in factor prices play a crucial role in establishing this equilibrium. Under this framework we examine the validity of factor price equalization, patterns of trade and gains from trade. Effects of technological progress and preference changes on firm locations are also analysed.     

FDI in space: Spatial autoregressive relationships in foreign direct investment

There are a number of theoretical reasons why foreign direct investment (FDI) into a host country may depend on the FDI in proximate countries. Such spatial interdependence has been largely ignored by the empirical FDI literature, with only a couple recent papers accounting for such issues in their estimation. This paper conducts a general examination of spatial interactions in empirical FDI models using data on US outbound FDI activity. We find that estimated relationships of traditional determinants of FDI are surprisingly robust to inclusion of terms to capture spatial interdependence, even though such interdependence is estimated to be significant. However, we find that both the traditional determinants of FDI and the estimated spatial interdependence are quite sensitive to the sample of countries one examines.     

Migrant networks and foreign direct investment

Although there exists a sizeable literature documenting the importance of ethnic networks for international trade, little attention has been devoted to studying the effects of migrants on foreign direct investment (FDI). The presence of migrants can stimulate FDI by promoting information flows across international borders and by serving as a contract enforcement mechanism. This paper investigates the link between the presence of migrants in the US and US FDI in the migrants' countries of origin, taking into account the potential endogeneity concerns. The results suggest that US FDI abroad is positively correlated with the presence of migrants from the host country. The data further indicate that the relationship between FDI and migration is stronger for migrants with tertiary education.     

Agglomeration economies and location choice: Foreign direct investment in Hungary1

Since the beginning of the transition process, Hungary has attracted a significant amount of foreign direct investment (FDI), although this is unevenly distributed among the twenty Hungarian counties. This paper examines the determinants of FDI at a regional level in Hungary and more particularly assesses the importance of agglomeration effects among determinants. A panel model of the location determinants of FDI in Hungary is developed and estimated. Empirical testing suggests that counties with higher labour availability, greater industrial demand and higher manufacturing density attract more FDI. Surprisingly, higher unit labour costs attract FDI. In addition, inter‐industrial agglomeration economies and infrastructure availability are found to be important.     

Interdependence in multinational production networks

Abstract Most multinational firms today operate multilateral production networks. Most existing empirical analyses, however, have focused on firms’ choice between producing at home and investing overseas. This paper uses detailed French multinational subsidiary data to examine the effect of existing production networks on multinationals’ entry decisions. The paper finds strong horizontal and vertical interdependence across multinationals’ foreign production locations, but little interdependence between home and foreign production when third‐country effects are taken into account. This result constitutes a sharp contrast to the conventional emphasis and highlights the importance of investigating foreign direct investment in the context of multinational production networks.     

Skills, agglomeration and segmentation

This paper studies the role of skill heterogeneity in “new economic geography” models of location. In our setting, products are both horizontally and vertically differentiated, and producing higher quality goods requires workers with higher skills. Selling to customers based in a different location entails iceberg-type transport costs and additional “communication costs” consisting of a fixed quality loss. We show that the presence of pecuniary externalities creates a mechanism which always promotes spatial sorting of workers according to their skill levels. In particular, in all stable equilibria, workers with higher skill choose to stay in the location where aggregate skill and income is higher, while the less skilled stay in the other.     

Competition in the traditional sector does not matter for the ‘Core–Periphery’ model

We modify Paul Krugman’s (1991) ‘Core–Periphery’ model by replacing the traditional competitive sector with a monopolistically competitive one. We show that the structure of spatial equilibria remains the same as in the original model. This result continues to hold true under Cournot or Bertrand oligopolistic competition with free entry in the traditional sector. The key factor that explains why the nature of competition in the traditional sector does not matter for the spatial equilibria is constant expenditure shares–due to nested Cobb–Douglas and CES preferences–which imply that trade in the traditional sector is independent from its sectoral characteristics.