Vertical Foreign Direct Investment, Industry Structure and Welfare
23 Pages Posted: 16 Apr 2001
Date Written: March 2001
This paper analyzes the effects of vertical foreign direct investment on industry structure, prices and welfare in two different scenarios. In the first case, the total number of firms is fixed, and we show that national and multinational firms may coexist. In the second case, market entry is allowed, and we demonstrate that either only national or only multinational firms will be active. Furthermore, we show that vertical foreign direct investment will always reduce prices whereas the aggregate welfare effect is unambiguously positive only under free market entry. Finally, we discuss impact effects on labor demand.
Keywords: Vertical foreign direct investment, multinational enterprises, imperfect competition, welfare, labor demand
JEL Classification: f12, f15
Suggested Citation: Suggested Citation