Boomerang Effect of FDI
This article develops a duopoly model (one home and one foreign firms) of FDI examining whether the boomerang effect exists and what determines it. We show that for a given cost disadvantage to the home firm there is a range of of shipping costs with which the home firm chooses to be a multinational enterprise (MNE) performing FDI rather than to export its products, and that cost parameters, especially plant-specific fixed cost, and demand parameter affect the range of the shipping cost inducing FDI. We also show that the boomerang effect exists when the home firm reversely imports its products from the foreign country for sales in the home market. Our welfare analysis show that the existence of boomerang effect does not necessarily deteriorate the welfare of the home country, suggesting the firms of a industry facing intensified import competition to conduct more FDI as a policy implication, depending on the shipping cost. Trade liberalization in the foreign country has different effects on the home firm's incentive for FDI
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