Trade versus Direct Investment: Modal Neutrality and National Treatment
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.
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- Barbara J. Spencer & James A. Brander, 1982. "Tariff Protection and Imperfect Competition," Working Papers 517, Queen's University, Department of Economics.
- 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, January.
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- 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.
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