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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 first fully characterize the spatial equilibria analytically. Comparing the equilibrium and the first-best, we secondly show that both organizational and spatial inefficiencies may arise. In particular, when fixed costs are low, when transport costs are high, and when products are close substitutes, the market outcome may well have to too many multinationals operating from a social point of view (`over-investment'). As a by-product, under-agglomeration of exporters in the larger market may arise.

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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
Date of revision:
Handle: RePEc:man:sespap:0519
Contact details of provider: Postal: Manchester M13 9PL
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  1. 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.
  2. Ottaviano, Gianmarco & Thisse, Jacques-François, 2003. "Agglomeration and Economic Geography," CEPR Discussion Papers 3838, C.E.P.R. Discussion Papers.
  3. Gianmarco Ottaviano & Takatoshi Tabuchi & Jacques-FranÁois Thisse, 2002. "Agglomeration and Trade Revisited," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(2), pages 409-436, May.
  4. 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.
  5. Markusen, James R. & Venables, Anthony J., 2000. "The theory of endowment, intra-industry and multi-national trade," Journal of International Economics, Elsevier, vol. 52(2), pages 209-234, December.
  6. Jan I. Haaland & Ian Wooton & Giulia Faggio, 2002. "Multinational Firms: Easy Come, Easy Go?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 59(1), pages 3-, February.
  7. Ekholm, Karolina & Forslid, Rikard, 2001. " Trade and Location with Horizontal and Vertical Multi-region Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(1), pages 101-18, March.
  8. Raybaudi-Massilia, Marzia, 2000. "Economic Geography and Multinational Enterprise," Review of International Economics, Wiley Blackwell, vol. 8(1), pages 1-19, February.
  9. Keith Head & Thierry Mayer, 2000. "Non-Europe: The magnitude and causes of market fragmentation in the EU," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(2), pages 284-314, June.
  10. Keith Head & Thierry Mayer & John Ries, 2002. "On the pervasiveness of home market effects," Post-Print hal-01017590, HAL.
  11. 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.
  12. 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.
  13. 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.
  14. Jonathan Haskel & Holger Wolf, 2001. "The Law of One Price - A Case Study," NBER Working Papers 8112, National Bureau of Economic Research, Inc.
  15. Ottaviano, Gianmarco & Thisse, Jacques-François, 1999. "Integration, Agglomeration and the Political Economics of Factor Mobility," CEPR Discussion Papers 2185, C.E.P.R. Discussion Papers.
  16. 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.
  17. Andreas Haufler & Ian Wooton, . "Country Size and Tax Competition for Foreign Direct Investment," Working Papers 9702, Business School - Economics, University of Glasgow.
  18. Keith Head & Thierry Mayer & John Ries, 2002. "On the Pervasiveness of Home Market Effects," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00267444, HAL.
  19. 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.
  20. Keith Head & Thierry Mayer, 2000. "Non-Europe : The Magnitude and Causes of Market Fragmentation in the EU," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00267441, HAL.
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