Foreign Direct Investment and the Welfare Effects of Cost Harmonization

ISER Discussion Paper No. 741

30 Pages Posted: 28 May 2009

See all articles by Kaz Miyagiwa

Kaz Miyagiwa

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

Anthony Creane

University of Kentucky

Multiple version iconThere are 2 versions of this paper

Date Written: May 21, 2009

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, welfare

JEL Classification: F12, F21

Suggested Citation

Miyagiwa, Kaz and Creane, Anthony, Foreign Direct Investment and the Welfare Effects of Cost Harmonization (May 21, 2009). ISER Discussion Paper No. 741. Available at SSRN: https://ssrn.com/abstract=1407949 or http://dx.doi.org/10.2139/ssrn.1407949

Kaz Miyagiwa (Contact Author)

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

Anthony Creane

University of Kentucky ( email )

Lexington, KY 40506
United States

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