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Welfare, home market effects, and horizontal foreign direct investment

  • BEHRENS, Kristian
  • PICARD, Pierre M.

We investigate the spatial distribution and organization of an imperfectly competitive industry when firms may choose to operate more than a single production unit. Focusing on a short-run setting with a fixed mass of firms, we fully characterize the spatial equilibria analytically. Comparing the equilibrium and the first-best, we show that both organizational and spatial inefficiencies may arise. In particular, when fixed costs are low enough the market outcome may well lead to overinvestment and, therefore, to too many multinationals operating from a social point of view. Furthermore, once multinationals are taken into account, the market outcome may well lead too little agglomeration.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2005065.

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Date of creation: 00 Oct 2005
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Handle: RePEc:cor:louvco:2005065
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  1. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 71(1), pages 121-139, January.
  2. Ottaviano, Gianmarco & Thisse, Jacques-François, 1998. "Agglomeration and Trade Revisited," CEPR Discussion Papers 1903, C.E.P.R. Discussion Papers.
  3. Jan I. Haaland & Ian Wooton & Giulia Faggio, 2002. "Multinational Firms: Easy Come, Easy Go?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 59(1), pages 3-, February.
  4. Keith Head & Thierry Mayer & John Ries, 2000. "On the Pervasiveness of Home Market Effects," Econometric Society World Congress 2000 Contributed Papers 0862, Econometric Society.
  5. Haskel, Jonathan & Wolf, Holger, 2001. " The Law of One Price--A Case Study," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(4), pages 545-58, December.
  6. James R. Markusen & Anthony J. Venables, 1995. "Multinational Firms and The New Trade Theory," NBER Working Papers 5036, National Bureau of Economic Research, Inc.
  7. Davis, Donald R. & Weinstein, David E., 2003. "Market access, economic geography and comparative advantage: an empirical test," Journal of International Economics, Elsevier, vol. 59(1), pages 1-23, January.
  8. Keith Head & Thierry Mayer, 2004. "Non-Europe : the magnitude and causes of market fragmentation in the EU," Cahiers de la Maison des Sciences Economiques bla99004a, Université Panthéon-Sorbonne (Paris 1).
  9. James R. Markusen & Anthony J. Venables, 1996. "The Theory of Endowment, Intra-Industry, and Multinational Trade," NBER Working Papers 5529, National Bureau of Economic Research, Inc.
  10. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  11. Markusen, James R. & Venables, Anthony J., 1999. "Foreign direct investment as a catalyst for industrial development," European Economic Review, Elsevier, vol. 43(2), pages 335-356, February.
  12. Ottaviano, Gianmarco & Thisse, Jacques-François, 2003. "Agglomeration and Economic Geography," CEPR Discussion Papers 3838, C.E.P.R. Discussion Papers.
  13. Ottaviano, Gianmarco & Thisse, Jacques-François, 1999. "Integration, Agglomeration and the Political Economics of Factor Mobility," CEPR Discussion Papers 2185, C.E.P.R. Discussion Papers.
  14. Raybaudi Massilia, M., 1995. "Economic geography and multinational enterprise," Discussion Paper Series In Economics And Econometrics 9520, Economics Division, School of Social Sciences, University of Southampton.
  15. Ekholm, Karolina & Forslid, Rikard, 2001. " Trade and Location with Horizontal and Vertical Multi-region Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(1), pages 101-18, March.
  16. J. V. Henderson & J. F. Thisse (ed.), 2004. "Handbook of Regional and Urban Economics," Handbook of Regional and Urban Economics, Elsevier, edition 1, volume 4, number 4.
  17. Krugman, Paul R, 1981. "Intraindustry Specialization and the Gains from Trade," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 959-73, October.
  18. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, vol. 87(4), pages 520-44, September.
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