Foreign Direct Investment and the Welfare Effects of Cost Harmonization

29 Pages Posted: 11 Feb 2008 Last revised: 14 Apr 2009

See all articles by Anthony Creane

Anthony Creane

University of Kentucky

Kaz Miyagiwa

Emory University - Department of Economics; Osaka University - Institute of Social and Economic Research (ISER); Florida International University (FIU) - Department of Economics

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Date Written: April 15, 2008

Abstract

Foreign direct investment (FDI) gives foreign firms access to local labor and inputs, thereby harmonizing costs between foreign and domestic firms relative to exports. This paper investigates the welfare effects of such cost harmonization in strategic environments, finding that when the number of home firms is sufficiently close to the number of foreign firms, FDI reduces home welfare, whether FDI raises or decreases foreign firms’ marginal costs. An implication is that under the same conditions, a country is harmed by tax harmonization on products that bring foreign taxes on product it imports inline with domestic ones for products.

Keywords: Foreign investment, Cournot competition, national welfare

JEL Classification: F12, F21

Suggested Citation

Creane, Anthony and Miyagiwa, Kaz, Foreign Direct Investment and the Welfare Effects of Cost Harmonization (April 15, 2008). Available at SSRN: https://ssrn.com/abstract=1090566 or http://dx.doi.org/10.2139/ssrn.1090566

Anthony Creane (Contact Author)

University of Kentucky ( email )

Lexington, KY 40506
United States

Kaz Miyagiwa

Emory University - Department of Economics ( email )

1602 Fishburne Drive
Atlanta, GA 30322
United States

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki Osaka 567-0047
Japan

Florida International University (FIU) - Department of Economics ( email )

Miami, FL 33199
United States

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