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Brotherhood of competition: Foreign Direct Investment and domestic mergers

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  • Kayalica, Ozgur M.
  • Espinosa-Ramirez, Rafael S.

Abstract

We examine the effects of mergers on Foreign Direct Investment (FDI), and on shaping national policies regarding FDI. In this work we develop a partial equilibrium model of an oligopolistic industry in which a number of domestic and foreign firms compete in the market for a homogeneous good in a host country. It is assumed that the number of foreign firms is endogenous and can be affected by the government policy in the host country. The government sets the policy (subsidies) to maximise social welfare. We allow domestic mergers. Our main results suggest that when the host country government imposes discriminatory lump-sum subsidy in favor of foreign firms, a merger of domestic firms will increase the number of FDI if the subsidy level is exogenous. With an endogenous level of subsidy, a merger of domestic firms will decrease (increase) the welfare if the domestic firms are more (less) efficient.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 18 (2009)
Issue (Month): 1 (January)
Pages: 63-69

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Handle: RePEc:eee:reveco:v:18:y:2009:i:1:p:63-69

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Web page: http://www.elsevier.com/locate/inca/620165

Related research

Keywords: Foreign Direct Investment Merger Subsidy;

References

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  1. Lahiri,Sajal & Ono,Yoshiyasu, 2007. "Trade and Industrial Policy under International Oligopoly," Cambridge Books, Cambridge University Press, number 9780521038171.
  2. Hassan Benchekroun & Amrita Ray Chaudhuri, 2006. "Trade Liberalization and the Profitability of Mergers: a Global Analysis," Review of International Economics, Wiley Blackwell, vol. 14(5), pages 941-957, November.
  3. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  4. Janeba,Eckhard, 1991. "Corporate income tax competition,Double taxation treaties, and foreign direct investment," Discussion Paper Serie A 361, University of Bonn, Germany.
  5. M. Ozgur Kayalica & Sajal Lahiri, 2007. "Domestic lobbying and foreign direct investment. The role of policy instruments," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 16(3), pages 299-323.
  6. Itagaki, Takao, 1979. "Theory of the Multinational Firm: An Analysis of Effects of Government Policies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 437-48, June.
  7. Rafael S. Espinosa Ramírez & M. Ozgur Kayalica, 2007. "Environmental Policies and Mergers’ Externalities," Economia Mexicana NUEVA EPOCA, , vol. 0(1), pages 47-74, January-J.
  8. Ross, Thomas W., 1988. "On the price effects of mergers with freer trade," International Journal of Industrial Organization, Elsevier, vol. 6(2), pages 233-246.
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  10. Brander, James A. & Spencer, Barbara J., 1987. "Foreign direct investment with unemployment and endogenous taxes and tariffs," Journal of International Economics, Elsevier, vol. 22(3-4), pages 257-279, May.
  11. Long, Ngo Van & Vousden, Neil, 1995. "The Effects of Trade Liberalization on Cost-Reducing Horizontal Mergers," Review of International Economics, Wiley Blackwell, vol. 3(2), pages 141-55, June.
  12. Horstmann, Ignatius J & Markusen, James R, 1987. "Strategic Investments and the Development of Multinationals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 109-21, February.
  13. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Scholarly Articles 3445092, Harvard University Department of Economics.
  14. Neven, Damien J, 1992. "Regulatory Reform in the European Community," American Economic Review, American Economic Association, vol. 82(2), pages 98-103, May.
  15. Aditya Bhattacharjea, 2001. "Foreign entry and domestic welfare: lessons for developing countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 11(2), pages 143-162.
  16. Smith, Alasdair, 1987. "Strategic investment, multinational corporations and trade policy," European Economic Review, Elsevier, vol. 31(1-2), pages 89-96.
  17. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
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Cited by:
  1. Hao, Qian & Lahiri, Sajal, 2009. "Competition for foreign direct investment: The role of technology and market structure," International Review of Economics & Finance, Elsevier, vol. 18(4), pages 680-690, October.

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