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Multilateral Trade Liberalisation, Foreign Direct Investment and the Volume of World Trade

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Abstract

A paradox in international trade is that multilateral trade liberalisation has resulted in increases in both the volume of world trade and the amount of foreign direct investment (FDI). This note presents a Cournot duopoly model with two regions, each consisting of two countries, and with an inter-regional transport cost. It is shown that multilateral trade liberalisation may lead firms to switch from exporting to undertaking export-platform FDI when the interregional transport cost is high. Also, when the inter-regional transport cost is high, the switch to FDI leads to an increase in the volume of world trade in this industry.

Suggested Citation

  • Collie, David R., 2010. "Multilateral Trade Liberalisation, Foreign Direct Investment and the Volume of World Trade," Cardiff Economics Working Papers E2010/4, Cardiff University, Cardiff Business School, Economics Section.
  • Handle: RePEc:cdf:wpaper:2010/4
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    1. Neary, J. Peter, 2009. "Trade costs and foreign direct investment," International Review of Economics & Finance, Elsevier, vol. 18(2), pages 207-218, March.
    2. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, May.
    3. Motta, Massimo, 1992. "Multinational firms and the tariff-jumping argument : A game theoretic analysis with some unconventional conclusions," European Economic Review, Elsevier, vol. 36(8), pages 1557-1571, December.
    4. Horstmann, Ignatius J. & Markusen, James R., 1992. "Endogenous market structures in international trade (natura facit saltum)," Journal of International Economics, Elsevier, vol. 32(1-2), pages 109-129, February.
    5. Neary, J Peter, 2002. "Foreign Direct Investment and the Single Market," Manchester School, University of Manchester, vol. 70(3), pages 291-314, June.
    6. Norman, George & Motta, Massimo, 1993. "Eastern European Economic Integration and Foreign Direct Investment," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(4), pages 483-507, Winter.
    7. Motta, Massimo & Norman, George, 1996. "Does Economic Integration Cause Foreign Direct Investment?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 757-783, November.
    8. Rowthorn, R E, 1992. "Intra-industry Trade and Investment under Oligopoly: The Role of Market Size," Economic Journal, Royal Economic Society, vol. 102(411), pages 402-414, March.
    9. Ignatius J. Horstmann & James R. Markusen, 1990. "Endogenous Market Structures in International Trade," NBER Working Papers 3283, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Duarte Brito & Daniel Magueta, 2014. "Horizontal Mergers, Entry and International Trade," Review of International Economics, Wiley Blackwell, vol. 22(5), pages 923-943, November.
    2. repec:krk:eberjl:v:5:y:2017:i:1:p:151-167 is not listed on IDEAS
    3. Giuseppe Francesco Gori & Luca Lambertini & Alessandro Tampieri, 2014. "Trade costs, FDI incentives, and the intensity of price competition," International Journal of Economic Theory, The International Society for Economic Theory, vol. 10(4), pages 371-385, December.
    4. Andrzej Cieslik, 2016. "Exports Versus Fdi In Smith-Motta Framework," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 11(2), pages 189-218, June.
    5. Charles Braymen & Yang-Ming Chang & Zijun Luo, 2016. "Tax Policies, Regional Trade Agreements and Foreign Direct Investment: A Welfare Analysis," Pacific Economic Review, Wiley Blackwell, vol. 21(2), pages 123-150, May.
    6. repec:wsi:jicepx:v:08:y:2017:i:01:n:s1793993317500053 is not listed on IDEAS
    7. Brun, Jean-François & Gnangnon, Sèna Kimm, 2017. "Does trade openness contribute to driving financing flows for development?," WTO Staff Working Papers ERSD-2017-06, World Trade Organization (WTO), Economic Research and Statistics Division.
    8. repec:bla:ecaffa:v:37:y:2017:i:1:p:66-84 is not listed on IDEAS
    9. repec:eee:riibaf:v:45:y:2018:i:c:p:15-29 is not listed on IDEAS

    More about this item

    Keywords

    Trade Liberalisation; Foreign Direct Investment; Cournot oligopoly;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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