Direct Investment, Monopoly and Welfare

This paper considers foreign direct investment which produces a manufactured good entirely for the market of the host country. It analyzes the welfare implications of an expansion of this activity, and compares the results with ones obtained from the model of export processing zones. It is shown that, contrary to the case of EPZs, an expansion of market-oriented direct investment improves welfare under free trade, and if there is an import tariff, the expansion may improve welfare under certain conditions.