Mode, Size, and Location of Foreign Direct Investments and Industry Markups

Abstract

Several studies find that inward foreign direct investment (FDI) raises host industries' competition and productivity using aggregate FDI measures: the monetary flows or the change in the industries' foreign production share. Yet FDI flows are composed of many individual, heterogeneous investments. Reflecting this heterogeneity, I ask how the average traits of the individual investments that constitute the FDI flow further affect the host. While the results show that inward FDI does heighten competition for US manufacturing industries in 1987-1991, price-cost markups fall even more when foreign investments locate further away from incumbent industry, which is consistent with endogenous location choice.

Keywords: foreign direct investment, competition, location choice, entry mode

JEL Classification: F23, L11