Foreign Direct Investment (FDI) occurs in temporal clusters. In contrast to the existing literature, which explains these clusters as being a result of oligopolistic reaction, this paper presents a two-by-two-by-two general equilibrium model of companies which engage in monopolistic competition. These companies can serve a foreign market through exports or by producing abroad. With falling transport and communication costs, the internationalisation of production becomes profitable and, thus, multinational enterprises (MNE) emerge. In this process, FDI of companies from one country occurs in clusters, because an FDI of one company increases the profitability of FDI of any other national competitor.
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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number
930.
Length: 50 pages Date of creation: Jun 1999 Date of revision: Handle: RePEc:kie:kieliw:930
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Find related papers by JEL classification: C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
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