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Domestic lobbying and foreign direct investment. The role of policy instruments


  • M. Ozgur Kayalica
  • Sajal Lahiri


Following the Common Agency approach to political equilibrium, we examine how domestic interest groups can influence national policies toward FDI and how the choice of instrument by the government can affect lobbying activities. Domestic firms lobby for lower subsidies when a discriminatory subsidy on FDI is applied. However, when a subsidy is applied uniformly to both groups, they may lobby for higher subsidies. The nature of lobbying is also different for proportional and lump-sum profit subsidies when uniformly applied. The qualitative effect of the number of domestic firms or the degree of corruption on the equilibrium depends on the choice of instruments. Finally, with the help of numerical simulation, we examine whether there is any potential conflict between the government and the lobby groups on the choice of the instrument.

Suggested Citation

  • M. Ozgur Kayalica & Sajal Lahiri, 2007. "Domestic lobbying and foreign direct investment. The role of policy instruments," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 16(3), pages 299-323.
  • Handle: RePEc:taf:jitecd:v:16:y:2007:i:3:p:299-323 DOI: 10.1080/09638190701524316

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    References listed on IDEAS

    1. 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.
    2. Svetlana Demidova, 2008. "Productivity Improvements And Falling Trade Costs: Boon Or Bane?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(4), pages 1437-1462, November.
    3. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    4. repec:rus:hseeco:122439 is not listed on IDEAS
    5. Venables, Anthony J, 1987. "Trade and Trade Policy with Differentiated Products: A Chamberlinian-Ricardian Model," Economic Journal, Royal Economic Society, vol. 97(387), pages 700-717, September.
    6. Roberts, Mark J & Tybout, James R, 1997. "The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs," American Economic Review, American Economic Association, vol. 87(4), pages 545-564, September.
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    Cited by:

    1. Federico Etro, 2014. "Optimal Trade Policy under Endogenous Foreign Entry," The Economic Record, The Economic Society of Australia, vol. 90(290), pages 282-300, September.
    2. Hiroaki Ino & Akira Miyaoka, 2016. "Government-induced Production Commitment in the Open Economy," Discussion Paper Series 142, School of Economics, Kwansei Gakuin University, revised May 2016.
    3. Kayalica, Ozgur M. & Espinosa-Ramirez, Rafael S., 2009. "Brotherhood of competition: Foreign Direct Investment and domestic mergers," International Review of Economics & Finance, Elsevier, vol. 18(1), pages 63-69, January.
    4. M. Ozgur Kayalica & Rafael Salvador Espinosa Ramirez, 2012. "Political contributions, subsidy and mergers," EconoQuantum, Revista de Economia y Negocios, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 9(2), pages 61-80, Julio-Dic.

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    Foreign direct investment; lobbying; subsidies;


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