The Byrd Amendment as Facilitating a Tacit International Business Collusion

This paper analyzes the effect of the Byrd Amendment, which amended the US Tariff Act of 1930 to allow revenues from antidumping duties to be distributed to domestic import‐competing firms. In an international oligopoly framework it is shown that it urges the home firm to restrict output so that the foreign firm increases output and pays more duties. Consequently, not only the home firm but also the foreign firm is better off while only consumers are worse off. Home total surplus also increases under this policy especially when the home firm is very inefficient.     

Cost Signals under Uncertain R&D Outcomes

When it is difficult for firms to differentiate their products from those of their competitors, research and development (R&D) spending on process innovation to lower the cost of production is crucial for profitability. However, the information asymmetry in production costs that results from innovation reduces the efficiency of all firms in a market for a homogeneous good. We employ a signalling game to discuss the feasibility of utilising R&D spending and output levels as cost signals in an environment of quantity competition. The results show that a firm does not spend its money on R&D solely to signal the type of cost. Rather, R&D spending may be chosen as a cost signal over the output level only if expenditures on R&D can lead to a sufficiently high probability of reducing production costs.     

ANTIDUMPING,INTRA‐INDUSTRY TRADE,AND QUALITY REVERSALS

We examine an export game where two (home and foreign) firms produce vertically differentiated products. The foreign firm is more R&D efficient and is based in a larger and richer market. The unique (risk‐dominant) Nash equilibrium exhibits intra‐industry trade, and the foreign producer manufactures a higher‐quality product. When transport costs are low, unilateral dumping by the foreign firm arises; otherwise, reciprocal dumping occurs. For some parameters, a domestic antidumping policy leads to a quality reversal in the international market whereby the home firm becomes the quality leader. This policy is desirable for the implementing country, though world welfare decreases.     

Foreign direct investment as a signal

This paper models oligopolistic competition among potential multinational firms in an environment of firm heterogeneity, incomplete information on costs, and strategic interactions. We show that foreign direct investment is more likely if it can serve as a signal of productivity in an environment of incomplete information as firms would like to avoid sending a low productivity signal. Our model shows that this effect is strong enough such that foreign direct investment can be an optimal foreign entry mode even if trade costs are zero.     

Tariffs as Signals of Uncompetitiveness

In this paper, a domestic and a foreign firm compete as Cournot duopolists in the domestic market. The foreign firm has incomplete information about the costs of the domestic firm, but the domestic government and the domestic firm are completely informed. It is shown that the domestic government can use its tariff to signal about the costs of the domestic firm. In the separating equilibrium, the domestic government signals the uncompetitiveness of the domestic firm by setting a lower tariff than is optimal under complete information.     

LOBBYING UNDER ASYMMETRIC INFORMATION

We analyze an informational theory of lobbying in the context of strategic trade policy. A home firm competes with a foreign firm to export to a third country. The home policy-maker aims to improve the home firm's profit using an export subsidy. The optimal export subsidy depends on the demand conditions in the third country, which are unknown to the policy-maker. The home firm can convey this information to the policy-maker via costly lobbying. Surprisingly, the presence of lobbying costs can be advantageous for both: it makes the home firm's lobby effort credible and eases the policy-maker's information problem. We identify the conditions under which lobbying is beneficial on balance and the conditions under which it is harmful.     

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.     

Antidumping Regulations: Anti‐Competitive and Anti‐Export

In a Bertrand duopoly model, it is shown that an antidumping regulation can be strategically exploited by the home firm to reduce the degree of competition in the home market. The home firm commits not to export to the foreign market which gives the foreign firm a monopoly in its own market. As a result the foreign firm will increase its price allowing the home firm to increase its price and its profits. If the products are sufficiently close substitutes then the higher profits in the home market are large enough to compensate for the loss of profits on exports.     

Multinational Firms and Labor Market Pooling

In the presence of increasing specialization of workers it becomes more and more difficult for firms to find the most suitable workers. In such an environment a multinational enterprise (MNE) has an advantage because it can exchange workers between plants in different countries. Recruiting from the home and foreign plant leads to a larger labor market pool for an MNE, reducing the mismatch of its workforce. This paper analyzes the consequences of this advantage for production, employment, prices and wages. In line with recent empirical results, we find that the additional ability to recruit workers from the home and foreign labor market leads to lower mismatch, higher average productivity of workers, lower prices, higher output, and higher employment of a plant of an MNE as compared with a national firm, while the wage‐effects depend on firm productivity.     

Technology Gap Matters on Spillover

This paper develops an oligopoly model with endogenous technology spillovers through foreign direct investment (FDI). The foreign entrant brings a superior technology and therefore may spend resources to prevent spillovers of its technology to the home firm. The home firm has an incentive to spend resources to gain these spillovers. After firms strategically choose their expenditures to influence technology spillovers, they compete in a Cournot–Nash quantity game. This study provides theoretical insight on the positive and negative empirical spillover results of FDI on productivity of local firms. Up to a critical bound, the larger the initial technology gap between the foreign and home firms, the more the home firm spends to gain spillovers. Past that boundary, the home firm decreases spending. As a result, the home firm's profits from spillovers vary, but larger technology gaps engender greater net profit losses from FDI.     

Firm Metrics with Continuous R&;D,Quality Improvement,and Cournot Quantities

The paper considers a dynamic two-firm model of intra-industry trade in which the firms compete for the same market on the basis of product reliability. By assumption, the home firm always has the reliability cost advantage but it may or may not have the manufacturing cost advantage. The results suggest that reliability improvement always helps customers in that they pay a lower full quality price. Comparing the home firm with the foreign firm, metrics such as price, sales, profit margins, and variable profits depend on the relative costs, with the low cost firm performing better. Finally, although this is not the common outcome, the paper suggests that it is possible for the reliability cost advantages gained by R&D expenditures to overcome manufacturing cost disadvantages.     

Trade liberalization in a differentiated duopoly reconsidered

Constructing a model of differentiated Cournot duopoly, we consider welfare effects of trade liberalization (i.e. reductions in transport costs). We examine both multilateral trade (i.e. the firms in both countries export bilaterally) and unilateral trade, under which foreign entry is possible but the home firm cannot export. Some new results on trade gains under differentiated oligopoly are proved and their implications are discussed.     

Beat 'em or Join 'em? Export Subsidies versus International Research Joint Ventures in Oligopolistic Markets

We compare adversarial with cooperative industrial and trade policies in a dynamic oligopoly game in which a home and foreign firm compete in R&D and output and, because of spillovers, each firm benefits from the other's R&D. When the government can commit to an export subsidy, such a policy raises welfare relative to cooperation, except when R&D is highly effective and spillovers are near-complete. Without commitment, however, subsidisation may yield welfare levels much lower than cooperation and lower even than free trade, though qualifications to the dangers from no commitment are noted.
JEL classification: F 12; F 13     

Foreign Market Entry Strategies under Asymmetric Information*

A home firm signals her private cost information by expanding in a foreign firm’s country. Credible signaling to deter counter‐entry may occur through a direct investment (but not through exports), and may even entail entering an unprofitable market. While this produces social benefits, uninformative signaling may be welfare‐reducing. Hence, we argue that moderate to high location costs may be socially desirable. We also show that there are not simple monotonic relationships between technology/demand conditions and firms’ entry modes. Thus, the signaling interpretation of international expansion makes it possible to explain some controversial empirical findings on a theoretical ground.     

OPTIMUM-WELFARE AND MAXIMUM-REVENUE TARIFFS UNDER BERTRAND DUOPOLY

This article derives the maximum‐revenue tariff and the optimum‐welfare tariff under Bertrand duopoly with differentiated products. It is shown that both tariffs are lower under Bertrand duopoly than under Cournot duopoly. Also, the optimum‐welfare tariff may exceed the maximum‐revenue tariff under both Bertrand duopoly and Cournot duopoly. This result is more likely the lower the costs of the home firm relative to the costs of the foreign firm, and the greater the degree of product substitutability. Also, it is shown that the optimum‐welfare tariff is less likely to exceed the maximum‐revenue tariff under Bertrand duopoly than under Cournot duopoly.     

Eco-labels, Trade and Protectionism

Eco-labels are suspected to serve protectionist purposes. We analyze the choice between an environmental standard and a voluntary eco-label scheme in a partial trade model with one domestic firm and one foreign firm. The environmental standard will only apply to the domestic firm, while both firms can adopt the eco-label. Pollution is production related, and domestic consumers demand products that are produced in an “environmentally friendly” way. Our results show that it may be optimal for the domestic government to introduce an eco-label and get both firms to adopt the label, instead of setting an environmental standard. However, to what extent this policy serves protectionist purposes is ambiguous. In particular, if the willingness to pay for green products is sufficient to cover the pollution abatement costs of the foreign firm, foreign firm profit will increase while domestic firm profit will decrease compared to the outcome with a domestic environmental standard. On the other hand, if the willingness to pay for green products is insufficient, the foreign firm would be better off with a domestic environmental standard.     

Making Sense of Safeguards

The ASG was negotiated in response to the use of extralegal measures and inappropriate use of legal measures to restrict imports. More effective disciplines regarding implementation of Article XIX was recognized as an important unilateralism deterrent in policy implementation. These disciplines are subjective and objective. Disciplines that are quantifiable are more effective. Utilizing both balances rules and discretion. A home and foreign producer are used to assess SG in the context of adverse shocks. This framework entails a novel feature appropriate to SG. Firms are permitted to select optimal levels of downward flexibility in output in response to a possible shock. The extent of adjustment is directly related to the cost incurred. Firms choose flexibility in stage one and output in stage two. Without SG, firms will not insulate themselves completely from the conditional expectation of an adverse shock. Introducing the ASG increases the relative adjustment burden for the foreign firm.     

Information-eliciting compensation schemes

This paper examines the implications of the ‘residence’ approach to taxing foreign source income such as employed by the United States. It is argued that, because the repatriation of earnings to the home country investor and not the earnings themselves are typically the source of tax liability, the foreign source income tax should affect foreign investment differently depending on the required transfers of funds within the firm.One implication of viewing the tax in this way is that in order to maximize after-tax profits, a firm should finance its foreign investment out of foreign earnings to the greatest extent possible. That is, a firm's required foreign return jumps at the point at which desired foreign investment just exhausts foreign earnings. This allows us to draw a distinction between ‘mature’ foreign operations, which are at any point in time financed at the margin by investing earnings (and perhaps also pay dividends to their parent firm in the home country), and ‘immature’ foreign affiliates, which rely on funding from their parents (and should not be paying dividends). It is noted that survey evidence on multinational firm behavior is consistent with this distinction. Direct investment data indicate that mature foreign operations probably account for nearly 90 percent of U.S. foreign direct investment.The discussion then turns to investment incentives. It is shown that the home country's rate of tax on foreign source income and the presence or absence of a foreign tax credit should be irrelevant to a mature foreign operations's investment and dividend decisions. This conclusion, which conflicts sharply with the conventional wisdom, follows because the home country tax acts as an unavoidable cost. New firms' investment decisions are, on the other hand, influenced by home country taxes.     

Privatization and Strategic Mergers across Borders

We present a theoretical model to capture the role of privatization in the incentives for and implications of cross‐border horizontal mergers. Absent any merger incentives in an autarkic equilibrium, we show that a decrease in the degree of privatization will lower the incentives for diversification of international production. The incentives for diversification for any given degree of privatization will fall when the private and public firms are allowed to move sequentially rather than simultaneously. The presence of the public firm also introduces a new source of asymmetry in the incentives for cross‐border mergers: a reduction in the degree of privatization at home will dampen the potential gains from a take‐over of a home firm by a foreign firm but magnify the potential gains from a take‐over of a foreign firm by a home firm.     

Welfare Effects of Reducing Home Bias in Government Procurements: A Dynamic Contest Model

This paper models an international contest for government procurement as a dynamic game between a domestic firm and a foreign firm. We show that trade liberalization, in the form of a reduction in bias against the foreign firm, improves both domestic and global welfare if (i) either the foreign firm's profit is sufficiently large or (ii) the initial degree of home bias is sufficiently small. If the initial home bias is large, a small reduction in the bias may reduce welfare.