Welfare, Home Market Effects, and Horizontal Foreign Direct Investment

31 Pages Posted: 22 Oct 2007  

Kristian Behrens

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Université de Bourgogne - LATEC

Pierre M. Picard

Centre de Recherche en Économie Appliquée (CREA); Universite du Luxembourg

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Abstract

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.

Suggested Citation

Behrens, Kristian and Picard, Pierre M., Welfare, Home Market Effects, and Horizontal Foreign Direct Investment. Canadian Journal of Economics, Vol. 40, No. 4, pp. 1118-1148, November 2007. Available at SSRN: https://ssrn.com/abstract=1023107 or http://dx.doi.org/10.1111/j.1365-2966.2007.00445.x

Kristian Behrens (Contact Author)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

HOME PAGE: http://www.core.ucl.ac.be:16080/~behrens/

Université de Bourgogne - LATEC

Pôle d'Economie et de Gestion
21066 Dijon Cedex
France

Pierre M. Picard

Centre de Recherche en Économie Appliquée (CREA) ( email )

Campus Limpertsberg
162A, avenue de la Faïencerie
Luxembourg, 1511
Luxembourg

Universite du Luxembourg

L-1511 Luxembourg
Luxembourg

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