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Trade versus Direct Investment: Modal Neutrality and National Treatment

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  • Hoekman, Bernard
  • Saggi, Kamal

Abstract

International agreements increasingly constrain the ability of governments to use trade policies whereas few constraints apply to the use of investment policies. Using a model in which a local and a foreign firm compete in the domestic market, we analyse whether the foreign firm may be forced to adopt an inefficient mode of supply (exports versus FDI) when the domestic government is constrained in its ability to use trade policy, but is free to set its FDI policy. We find that the foreign firm chooses the efficient mode of supply, even under a discriminatory output tax levied on FDI. This result suggests that the case for multilateral investment rules on efficiency grounds needs careful evaluation.

Suggested Citation

  • Hoekman, Bernard & Saggi, Kamal, 2002. "Trade versus Direct Investment: Modal Neutrality and National Treatment," CEPR Discussion Papers 3375, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3375
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    References listed on IDEAS

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    1. Theodore H. Moran, 1998. "Foreign Direct Investment and Development: The New Policy Agenda for Developing Countries and Economies in Transition," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 53.
    2. Barbara J. Spencer & James A. Brander, 1982. "Tariff Protection and Imperfect Competition," Working Papers 517, Queen's University, Department of Economics.
    3. Brander, James A., 1995. "Strategic trade policy," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 27, pages 1395-1455 Elsevier.
    4. Hoekman, Bernard & Saggi, Kamal, 2000. "Assessing the Case for Extending WTO Disciplines on Investment-Related Policies," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 15, pages 629-653.
    5. Konishi, Hideo & Saggi, Kamal & Weber, Shlomo, 1999. "Endogenous trade policy under foreign direct investment," Journal of International Economics, Elsevier, vol. 49(2), pages 289-308, December.
    6. 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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    Citations

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    Cited by:

    1. Pehr-Johan Norbäck & Lars Persson, 2005. "Privatization Policy in an International Oligopoly," Economica, London School of Economics and Political Science, vol. 72(288), pages 635-653, November.
    2. Johdo, Wataru & Hashimoto, Ken-ichi, 2005. "International relocation, the real exchange rate and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 29(8), pages 1449-1469, August.

    More about this item

    Keywords

    foreign direct investment; modes of supply; national treatment; neutrality; oligopoly; trade policy;

    JEL classification:

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

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