Welfare, Home Market Effects, and Horizontal Foreign Direct Investment
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
Canadian Journal of Economics, Vol. 40, No. 4, pp. 1118-1148, November 2007
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.
Number of Pages in PDF File: 31
Date posted: October 22, 2007