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Potential FDI causing large distortions in domestic production

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  • Hisashi Sawaki

Abstract

When a foreign firm enters a domestic market, either via exports or through foreign direct investment (FDI), one factor determining the most favourable entrance mode is the profitability of the market, which may not be directly observed by the foreign firm. If the domestic trade protection policy is within a certain range that causes the foreign entrant's decision to swing between the two entry modes, the final choice will depend on the foreign firm's belief about the profitability. In such a situation, a domestic incumbent firm wishing to prevent FDI will heavily distort its production downward to convince the foreign competitor that the market is not profitable. When making trade policy, such strategic behaviour on the part of the domestic firm should be taken into account.

Suggested Citation

  • Hisashi Sawaki, 2008. "Potential FDI causing large distortions in domestic production," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 17(4), pages 485-500.
    • Handle: RePEc:taf:jitecd:v:17:y:2008:i:4:p:485-500
    DOI: 10.1080/09638190802249995
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    Cited by:

    1. Guglielmo Maria Caporale & Carlos Pestana Barros & Bruno Damasio, 2013. "Foreign direct investment in the Asian economies," NCID Working Papers 10/2013, Navarra Center for International Development, University of Navarra.

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