Foreign Direct Investment As A Commitment Mechanism In The Presence Of Managed Trade

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Foreign Direct Investment As A Commitment Mechanism In The Presence Of Managed Trade

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JOSHUA AIZENMAN

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Joshua Aizenman

Abstract

This paper evaluates the degree to which the threat of managed trade leads to foreign direct investment (FDI) in a time-consistent manner. An endogenous switch from free to managed trade may occur ex-post as the outcome of a sequential game. We identify time-inconsistent patterns of managed trade in the absence of capital mobility. We demonstrate that FDI alleviates this time inconsistency by reducing the ex-post incentive of one country to switch to managed trade. FDI induced by the threat of managed trade benefits ex-ante both the host country and the multinationals, explaining the relative tolerance toward FDI. [F15, F21]

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Article provided by Korean International Economic Association in its journal International Economic Journal.

Volume (Year): 10 (1996)
Issue (Month): 4 (December)
Pages: 1-28
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Handle: RePEc:taf:intecj:v:10:y:1996:i:4:p:1-28

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Paper
- Joshua Aizenman, 1992. "Foreign Direct Investment as a Commitment Mechanism in the Presence of Managed Trade," NBER Working Papers 4102, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Joshua Aizenman, 1991. "Foreign Direct Investment, Productive Capacity and Exchange Rate Regimes," NBER Working Papers 3767, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Baldwin, Richard & Krugman, Paul, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 635-54, November. [Downloadable!] (restricted)
Other versions:
- Richard Baldwin & Paul R. Krugman, 1986. "Persistent Trade Effects of Large Exchage Rate Shocks," NBER Working Papers 2017, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Aizenman, Joshua, 1994. "Monetary and Real Shocks, Productive Capacity and Exchange Rate Regimes," Economica, London School of Economics and Political Science, vol. 61(244), pages 407-34, November. [Downloadable!] (restricted)
Horst, Thomas, 1972. "Firm and Industry Determinants of the Decision to Invest Abroad: An Empirical Study," The Review of Economics and Statistics, MIT Press, vol. 54(3), pages 258-66, August. [Downloadable!] (restricted)
Alvin E Roth, 2008. "Axiomatic Models of Bargaining," Levine's Bibliography 122247000000002376, UCLA Department of Economics. [Downloadable!]
Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
Bagwell, Kyle & Staiger, Robert W, 1990. "A Theory of Managed Trade," American Economic Review, American Economic Association, vol. 80(4), pages 779-95, September. [Downloadable!] (restricted)
Other versions:
- Kyle Bagwell & Robert W. Staiger, 1988. "A Theory of Managed Trade," NBER Working Papers 2756, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Kyle Bagwell & Robert W. Staiger, 1989. "A Theory of Managed Trade," Discussion Papers 801, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
- Bagwell, K. & Staiger, R.W., 1988. "A Theory Of Managed Trade," Papers e-88-39, Stanford - Hoover Institution.
Ethier, Wilfred J, 1986. "The Multinational Firm," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 805-33, November. [Downloadable!] (restricted)
Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
Other versions:
- Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics. [Downloadable!]
Lipsey, Robert E & Weiss, Merle Yahr, 1981. "Foreign Production and Exports in Manufacturing Industries," The Review of Economics and Statistics, MIT Press, vol. 63(4), pages 488-94, November. [Downloadable!] (restricted)
Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-71, June. [Downloadable!] (restricted)

Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Richard Chisik & Ronald B. Davies, 2001. "Gradualism in Tax Treaties with Irreversible Foreign Direct Investment," Working Papers 0201, Florida International University, Department of Economics. [Downloadable!]
Other versions:
- Richard Chisik & Ronald B. Davies, 2000. "Gradualism in Tax Treaties with Irreversible Foreign Direct Investment," University of Oregon Economics Department Working Papers 2000-3, University of Oregon Economics Department, revised 01 Jun 2002. [Downloadable!]
- Richard Chisik & Ronald B. Davies, 2004. "Gradualism In Tax Treaties With Irreversible Foreign Direct Investment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 113-139, 02. [Downloadable!] (restricted)
Udo Broll, 1999. "Export As An Option," International Economic Journal, Korean International Economic Association, vol. 13(1), pages 19-26, April. [Downloadable!] (restricted)

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