Equilibrium coalition structures in the presence of foreign direct investment |
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Authors: | Hyejoon Im |
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Affiliation: | 1. School of Economics and Finance, Yeungnam University , 214-1 Dae-dong, Kyungsan, 712-749, South Korea 1200hours@hanmail.net |
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Abstract: | This paper incorporates foreign direct investment (FDI) into the examination of trading bloc formation with endogenously determined coalition structures. In so doing, we build a three-country model, in which firms serve foreign markets either by exporting or undertaking FDI, and consider a coalition formation game with the Coalition Proof Nash Equilibrium as an equilibrium concept. We find that the equilibrium coalition structure varies upon firms characterization before and after the formation of a trading bloc. As in the literature, when all firms are exporters in the pre- and post-formation, bilateralism can be an equilibrium outcome. However, when trade barriers are not so high as to be trade-prohibitive and the environment is favorable to multinational activities in the pre- or post-formation, only global free trade will prevail as an equilibrium coalition structure. |
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Keywords: | trading blocs FTA multinational corporations FDI coalition formation game |
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