Foreign Direct Investment in a Two‐Tier Oligopoly: Coordination, Vertical Integration, and Welfare

20 Pages Posted: 25 Nov 2011

See all articles by Ping Lin

Ping Lin

Lingnan University - Department of Economics

Kamal Saggi

Southern Methodist University (SMU) - Department of Economics

Date Written: November 2011

Abstract

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.

Suggested Citation

Lin, Ping and Saggi, Kamal, Foreign Direct Investment in a Two‐Tier Oligopoly: Coordination, Vertical Integration, and Welfare (November 2011). International Economic Review, Vol. 52, Issue 4, pp. 1271-1290, 2011, Available at SSRN: https://ssrn.com/abstract=1964493 or http://dx.doi.org/10.1111/j.1468-2354.2011.00667.x

Ping Lin

Lingnan University - Department of Economics ( email )

135 Xingang Xi Road
Tuen Mun
Guangzhou, Guangzhou 510275
China
(852)2616 7203 (Phone)
(852)2891 7940 (Fax)

Kamal Saggi

Southern Methodist University (SMU) - Department of Economics ( email )

Dallas, TX 75275
United States
214-768-3274 (Phone)
214-768-1821 (Fax)

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