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Foreign Direct Investment In A Two‐Tier Oligopoly: Coordination, Vertical Integration, And Welfare

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  • Ping Lin
  • Kamal Saggi

Abstract

We study foreign direct investment (FDI) by two independent investors/entrants into a two-tiered oligopolistic industry. An FDI subsidy at a single stage of production can be sufficient to resolve the coordination problem facing investors thereby inducing entry at both stages. However, due to linkage offsetting, FDI at both stages may yield lower domestic welfare than FDI at a single stage. Vertical integration not only solves the coordination problem, it also eliminates double marginalization. But since the integrated multinational does not sell the intermediate to local firms, its entry generates no vertical linkages and can yield lower welfare than FDI by independent firms.
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Suggested Citation

  • Ping Lin & Kamal Saggi, 2011. "Foreign Direct Investment In A Two‐Tier Oligopoly: Coordination, Vertical Integration, And Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(4), pages 1271-1290, November.
    • Handle: RePEc:ier:iecrev:v:52:y:2011:i:4:p:1271-1290
    DOI: j.1468-2354.2011.00667.x
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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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