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Foreign Direct Investment and the Welfare Effects of Cost Harmonization

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Author Info
Anthony Creane
Kaz Miyagiwa

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Abstract

Foreign direct investment (FDI) gives foreign firms access to local labor and inputs, thereby harmonizing costs between foreign and domestic firms relative to exports. This paper investigates the welfare effects of such cost harmonization in strategic environments, finding that when the number of home firms is sufficiently close to the number of foreign firms, FDI reduces home welfare, whether FDI raises or decreases foreign firms' marginal costs. An implication is that under the same conditions, a country is harmed by tax harmonization on products that bring foreign taxes on product it imports inline with domestic ones for products.

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Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0741.

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Date of creation: May 2009
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Handle: RePEc:dpr:wpaper:0741

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  4. Ted Bergstrom & Hal Varian, 1985. "Two Remarks on Cournot Equilibria," University of California at Santa Barbara, Economics Working Paper Series 1985C, Department of Economics, UC Santa Barbara. [Downloadable!]
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  5. Stephen W. Salant & Greg Shaffer, 1999. "Unequal Treatment of Identical Agents in Cournot Equilibrium," American Economic Review, American Economic Association, vol. 89(3), pages 585-604, June. [Downloadable!] (restricted)
  6. Joseph Farrell & Carl Shapiro, 1990. "Asset Ownership and Market Structure in Oligopoly," RAND Journal of Economics, The RAND Corporation, vol. 21(2), pages 275-292, Summer. [Downloadable!] (restricted)
  7. Creane, Anthony & Miyagiwa, Kaz, 2008. "Information and disclosure in strategic trade policy," Journal of International Economics, Elsevier, vol. 75(1), pages 229-244, May. [Downloadable!] (restricted)
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  8. Sen, Debapriya, 2005. "Fee versus royalty reconsidered," Games and Economic Behavior, Elsevier, vol. 53(1), pages 141-147, October. [Downloadable!] (restricted)
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