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Welfare, home market effects, and horizontal foreign direct investment

We investigate the spatial distribution and organization of an imperfectly competitive industry when firms may choose to operate more than a single production unit. Focusing on a short-run setting with a fixed mass of firms, we fully characterize the spatial equilibria analytically. Comparing the equilibrium and the first-best, we show that both organizational and spatial inefficiencies may arise. In particular, when fixed costs are low enough the market outcome may well lead to overinvestment and, therefore, to too many multinationals operating from a social point of view. Furthermore, once multinationals are taken into account, the market outcome may well lead too little agglomeration.

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File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/economics/discussionpapers/EDP-0519.pdf
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Paper provided by Economics, The University of Manchester in its series The School of Economics Discussion Paper Series with number 0519.

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Date of creation: 2005
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Handle: RePEc:man:sespap:0519
Contact details of provider: Postal: Manchester M13 9PL
Phone: (0)161 275 4868
Fax: (0)161 275 4812
Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/

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  1. Davis, Donald R. & Weinstein, David E., 2003. "Market access, economic geography and comparative advantage: an empirical test," Journal of International Economics, Elsevier, vol. 59(1), pages 1-23, January.
  2. James R. Markusen & Anthony J. Venables, 1996. "The Theory of Endowment, Intra-Industry, and Multinational Trade," NBER Working Papers 5529, National Bureau of Economic Research, Inc.
  3. OTTAVIANO, Gianmarco & THISSE, Jacques-François, 1999. "Agglomeration and trade revisited," CORE Discussion Papers 1999041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Keith Head & Thierry Mayer & John Ries, 2002. "On the pervasiveness of home market effects," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
  5. Markusen, James R. & Venables, Anthony J., 1999. "Foreign direct investment as a catalyst for industrial development," European Economic Review, Elsevier, vol. 43(2), pages 335-356, February.
  6. Keith Head & Thierry Mayer, 2004. "Non-Europe : the magnitude and causes of market fragmentation in the EU," Cahiers de la Maison des Sciences Economiques bla99004a, Université Panthéon-Sorbonne (Paris 1).
  7. J. V. Henderson & J. F. Thisse (ed.), 2004. "Handbook of Regional and Urban Economics," Handbook of Regional and Urban Economics, Elsevier, edition 1, volume 4, number 4.
  8. Jonathan Haskel & Holger C. Wolf, 2001. "The Law of One Price - A Case Study," CESifo Working Paper Series 428, CESifo Group Munich.
  9. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  10. OTTAVIANO, Gianmarco & THISSE, Jacques-François, 2003. "Agglomeration and economic geography," CORE Discussion Papers 2003016, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. James R. Markusen & Anthony J. Venables, 1995. "Multinational Firms and The New Trade Theory," NBER Working Papers 5036, National Bureau of Economic Research, Inc.
  12. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, vol. 87(4), pages 520-44, September.
  13. Haaland, J.I. & Wooton, I., 2000. "Multinational Firms: Easy Come, Easy Go?," Papers 19/00, Norwegian School of Economics and Business Administration-.
  14. Ottaviano, G.I.P. & Thisse, J.-F., 1999. "Integration, Agglomeration and the Political Economics of Factor Mobility," Economics Working Papers eco99/27, European University Institute.
  15. Ekholm, Karolina & Forslid, Rikard, 1998. "Trade and Location with Horizontal and Vertical Multi-Region Firms," Working Paper Series 504, Research Institute of Industrial Economics.
  16. Haskel, Jonathan & Wolf, Holger, 2001. " The Law of One Price--A Case Study," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(4), pages 545-58, December.
  17. Andreas Haufler & Ian Wooton, . "Country Size and Tax Competition for Foreign Direct Investment," Working Papers 9702, Business School - Economics, University of Glasgow.
  18. Raybaudi Massilia, M., 1995. "Economic geography and multinational enterprise," Discussion Paper Series In Economics And Econometrics 9520, Economics Division, School of Social Sciences, University of Southampton.
  19. Krugman, Paul R, 1981. "Intraindustry Specialization and the Gains from Trade," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 959-73, October.
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