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Market entry and foreign direct investment

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  • Stähler, Frank

Abstract

This paper discusses the impact of foreign direct investment (FDI) on market entry and welfare in a model of two countries and two periods. In the first period, firms enter the market as national firms, in the second period, FDI is possible. The paper demonstrates that FDI reduces market entry because equilibrium profits in the second period decline with a decrease in the fixed cost of FDI. Therefore, compared to a trade regime without any FDI, prices rise in the first period but decline in the second period. The paper shows, however, that FDI will unambiguously improve the sum of discounted consumer surplus.

Suggested Citation

  • Stähler, Frank, 2004. "Market entry and foreign direct investment," Center for European, Governance and Economic Development Research Discussion Papers 22, University of Goettingen, Department of Economics.
  • Handle: RePEc:zbw:cegedp:22
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    References listed on IDEAS

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    Cited by:

    1. Nishiyama, Hiroyuki & Yamaguchi, Masao, 2010. "Foreign direct investment, international trade, and firm heterogeneity," Economic Modelling, Elsevier, vol. 27(1), pages 184-195, January.

    More about this item

    Keywords

    Foreign direct investment; multinational enterprises; imperfect competition; free entry;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration

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