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Foreign Direct Investment and the Welfare Effects of Cost Harmonization


  • Anthony Creane
  • Kaz Miyagiwa


Foreign direct investment (FDI) gives foreign firms access to local labor and inputs, thereby harmonizing costs between foreign and domestic firms relative to exports. This paper investigates the welfare effects of such cost harmonization in strategic environments, finding that when the number of home firms is sufficiently close to the number of foreign firms, FDI reduces home welfare, whether FDI raises or decreases foreign firms' marginal costs. An implication is that under the same conditions, a country is harmed by tax harmonization on products that bring foreign taxes on product it imports inline with domestic ones for products.

Suggested Citation

  • Anthony Creane & Kaz Miyagiwa, 2009. "Foreign Direct Investment and the Welfare Effects of Cost Harmonization," ISER Discussion Paper 0741, Institute of Social and Economic Research, Osaka University.
  • Handle: RePEc:dpr:wpaper:0741

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    References listed on IDEAS

    1. Creane, Anthony & Miyagiwa, Kaz, 2008. "Information and disclosure in strategic trade policy," Journal of International Economics, Elsevier, vol. 75(1), pages 229-244, May.
    2. Qiu, Larry D. & Zhou, Wen, 2006. "International mergers: Incentives and welfare," Journal of International Economics, Elsevier, vol. 68(1), pages 38-58, January.
    3. Bergstrom, Theodore C. & Varian, Hal R., 1985. "Two remarks on Cournot equilibria," Economics Letters, Elsevier, vol. 19(1), pages 5-8.
    4. Sen, Debapriya, 2005. "Fee versus royalty reconsidered," Games and Economic Behavior, Elsevier, vol. 53(1), pages 141-147, October.
    5. Lahiri, Sajal & Ono, Yoshiyasu, 1988. "Helping Minor Firms Reduces Welfare," Economic Journal, Royal Economic Society, vol. 98(393), pages 1199-1202, December.
    6. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
    7. Greg Shaffer & Stephen W. Salant, 1999. "Unequal Treatment of Identical Agents in Cournot Equilibrium," American Economic Review, American Economic Association, vol. 89(3), pages 585-604, June.
    8. Joseph Farrell & Carl Shapiro, 1990. "Asset Ownership and Market Structure in Oligopoly," RAND Journal of Economics, The RAND Corporation, vol. 21(2), pages 275-292, Summer.
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    Cited by:

    1. repec:agr:journl:v:2(602):y:2015:i:2(602):p:223-236 is not listed on IDEAS
    2. Anthony Creane & Kaz Miyagiwa, 2011. "The Welfare Effect of International Cost Harmonization," Emory Economics 1105, Department of Economics, Emory University (Atlanta).
    3. Marinela GEAMÄ‚NU, 2015. "Analysis of the evolution of foreign direct investment in the European Union, amid the global economic crisis," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(2(603), S), pages 223-236, Summer.

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