Trading Blocs and Foreign Direct Investment: Endogenous Coalition Structure
I examine the relationship between trading blocs and Foreign Direct Investment (FDI). Firms in the model serve foreign markets either by exporting or by setting up plants abroad, which is FDI. I find that countries forming a bloc could attract FDI from non-member countries. However, I show by using a coalition formation game that this FDI-attracting bloc cannot be an equilibrium outcome when multilateralism (i.e., the free trade world) is an option for countries. This result is mainly related to the adverse welfare effects of the tariff-jumping FDI
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