International Economic Review
We study foreign direct investment (FDI) by two independent investors/entrants into a two-tiered oligopolistic industry. An FDI subsidy at a single stage of production can be sufficient to resolve the coordination problem facing investors thereby inducing entry at both stages. However, due to linkage offsetting, FDI at both stages may yield lower domestic welfare than FDI at a single stage. Vertical integration not only solves the coordination problem, it also eliminates double marginalization. But since the integrated multinational does not sell the intermediate to local firms, its entry generates no vertical linkages and can yield lower welfare than FDI by independent firms.
Copyright © (2011) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association
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Accepted Author Manuscript
Lin, P., & Saggi, K. (2011). Foreign direct investment in a two-tier oligopoly: Coordination, vertical integration, and welfare. International Economic Review, 52(4), 1271-1290. doi: 10.1111/j.1468-2354.2011.00667.x