Exporting versus Direct Investment under Local Sourcing |
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Authors: | Amy J?Glass Email author" target="_blank">Kamal?SaggiEmail author |
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Institution: | (1) Texas A&M University, College Station, TX, USA;(2) Department of Economics, Southern Methodist University, Dallas, TX 75275-0496, USA |
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Abstract: | This paper examines a setting where foreign direct investment (FDI) shifts demand for an intermediate good from the source
to the host country. A domestic and a foreign firm choose between exports or FDI, always sourcing the intermediate locally.
We show that by increasing the price of the intermediate, outward FDI can act as a cost-raising strategy for a firm and that attracting FDI can raise host country welfare. Two-way FDI is the equilibrium when the countries have
similar market sizes. However, such FDI reduces global welfare relative to two-way exporting since it eliminates indirect
competition between suppliers.
JEL no. F12, F13, F23, L13 |
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Keywords: | Foreign direct investment oligopoly intermediate goods and services multinational firms |
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