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Foreign Fast Seconds and Market Contestability in Emergin Economies: Implications for Domestic Welfare

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  • Dan Richards
  • Puqing Sheng

Abstract

Emerging markets economies often present profitable opportunities for entry by large mutinational firms domiciled in developed economies. Such entry has the potential to bring important gains to the emerging economy consumers as well. Yet at the same time, such foreign direct investment (FDI) also poses a risk in that it will typically induce exit by domestic firms. In turn, this can result in not only the loss of profit from such firms but also lead to increased concentration and less competition with additional adverse consequences for domestic consumers. Theoretical models that investigate this possibility include Ono (1990), Richardson (1998), and Bjorvatn (2000). The question has also motivated empirical work on specific non-tradable markets in which FDI has focused, most notably, the banking sector where the introduction of large scale FDI has typically been followed by domestic firm exit and substantially increased concentration in Latin America and Central Europe. These include studies by Clarke, Cull, and Martinez Peria (2001) and Gelos and Roldos (2002), and Mkrtchyan (2005). While these studies generally find that increased concentration has been associated with price-cost margins, this is not quite the same as a determination of the impact of such entry on domestic welfare.

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Bibliographic Info

Paper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 0730.

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Date of creation: 2009
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Handle: RePEc:tuf:tuftec:0730

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  1. Mary W. Sullivan, 1992. "Brand Extensions: When to Use Them," Management Science, INFORMS, vol. 38(6), pages 793-806, June.
  2. Curtis Eaton, B. & Schmitt, N., 1991. "Flexible Manufacturing and Market Structure," Papers 1991-02, Tasmania - Department of Economics.
  3. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  4. Gelos, R. G. & Roldos, Jorge, 2004. "Consolidation and market structure in emerging market banking systems," Emerging Markets Review, Elsevier, vol. 5(1), pages 39-59, March.
  5. MacLeod, W.B. & Norman, G. & Thisse, J.-F., 1988. "Price discrimination and equilibrium in monopolistic competition," International Journal of Industrial Organization, Elsevier, vol. 6(4), pages 429-446.
  6. Lynne Pepall & Dan Richards, 1999. "The Simple Economics of "Brand-Stretching"," Discussion Papers Series, Department of Economics, Tufts University 9905, Department of Economics, Tufts University.
  7. Norman George & Pepall Lynne & Richards Daniel J, 2008. "Entrepreneurial First Movers, Brand-Name Fast Seconds, and the Evolution of Market Structure," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-26, October.
  8. Clarke, George R. G. & Cull, Robert & Martinez Peria, Maria Soledad, 2001. "Does foreign bank penetration reduce access to credit in developing countries"evidence from asking borrowers," Policy Research Working Paper Series 2716, The World Bank.
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