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Endogenous Market Structure and the Gains from Foreign Direct Inverstment

  • Roberto A. De Santis
  • Frank Stähler

This paper discusses the gains from foreign direct investment (FDI) in a two country setting with endogenous markets structures under two alternative locations for the oligopolistic industry. If the oligopolistic industry is located in the domestic country only, we show that market concentration occurs if national and multinational firms coexist. In this case, FDI is welfare improving for the foreign country, but welfare declining for the domestic country. If only multinational firms are competitive, the impact on market structure and the welfare of the domestic country is indeterminate, whereas the welfare of the foreign country improves. By contrast, if the oligopolistic industry is located in both countries' then FDI compared to intraindustry trade leads to mutual welfare gains.

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 958.

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Length: 22 pages
Date of creation: Nov 1999
Date of revision:
Handle: RePEc:kie:kieliw:958
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  1. S. Lael Brainard, 1993. "A Simple Theory of Multinational Corporations and Trade with a Trade-Off Between Proximity and Concentration," NBER Working Papers 4269, National Bureau of Economic Research, Inc.
  2. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  3. James R. Markusen, 1998. "Multinational Firms, Location and Trade," The World Economy, Wiley Blackwell, vol. 21(6), pages 733-756, 08.
  4. Markusen, James R. & Venables, Anthony J., 1998. "Multinational firms and the new trade theory," Journal of International Economics, Elsevier, vol. 46(2), pages 183-203, December.
  5. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, June.
  6. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-71, June.
  7. Blonigen, Bruce A., 2001. "In search of substitution between foreign production and exports," Journal of International Economics, Elsevier, vol. 53(1), pages 81-104, February.
  8. James Brander, 1980. "Intra-Industry Trade in Identical Commodities," Working Papers 380, Queen's University, Department of Economics.
  9. James R. Markusen & Keith E. Maskus, 1999. "Discriminating Among Alternative Theories of the Multinational Enterprise," NBER Working Papers 7164, National Bureau of Economic Research, Inc.
  10. Horstmann, Ignatius J. & Markusen, James R., 1992. "Endogenous market structures in international trade (natura facit saltum)," Journal of International Economics, Elsevier, vol. 32(1-2), pages 109-129, February.
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