Home market effect in the presence of multinational activities: location and nationality

This study examines the phenomenon of home market effect (HME) through a framework where firms can serve a foreign market either via trade or via foreign direct investment (FDI). The results show that HME holds when determined through both location-based and nationality-based criteria. However, compared to the original measure of HME in the absence of FDI, the magnitude of the location-based HME is smaller whereas that of the nationality-based HME is larger. Comparative statics indicate that an increase in trade barriers reduces the magnitude of the location-based HME and that an increase in operative barriers facing foreign affiliates reduces the magnitude of the nationality-based HME. Also, larger restrictions on the foreign ownership of capital accentuate the location-based HME but attenuate the nationality-based HME.