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Welfare, Home Market Effects, and Horizontal Foreign Direct Investment

CORE Discussion Paper No. 2005/65

34 Pages Posted: 30 Jun 2006  

Kristian Behrens

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Université de Bourgogne - LATEC

Pierre M. Picard

Centre de Recherche en Économie Appliquée (CREA); Universite du Luxembourg

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Date Written: October 2005

Abstract

We investigate the spatial distribution and organization of an imperfectly competitive industry when firms may choose to operate more than a single production unit. Focusing on a short-run setting with a fixed mass of firms, we fully characterize the spatial equilibria analytically. Comparing the equilibrium and the first-best, we show that both organizational and spatial inefficiencies may arise. In particular, when fixed costs are low enough the market outcome may well lead to overinvestment and, therefore, to too many multinationals operating from a social point of view. Furthermore, once multinationals are taken into account, the market outcome may well lead too little agglomeration.

Keywords: international trade, imperfect competition, horizontal foreign direct investment, economic geography

JEL Classification: F12, F23, R12

Suggested Citation

Behrens, Kristian and Picard, Pierre M., Welfare, Home Market Effects, and Horizontal Foreign Direct Investment (October 2005). Available at SSRN: https://ssrn.com/abstract=894762 or http://dx.doi.org/10.2139/ssrn.894762

Kristian Behrens (Contact Author)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

HOME PAGE: http://www.core.ucl.ac.be:16080/~behrens/

Université de Bourgogne - LATEC

Pôle d'Economie et de Gestion
21066 Dijon Cedex
France

Pierre M. Picard

Centre de Recherche en Économie Appliquée (CREA) ( email )

Campus Limpertsberg
162A, avenue de la Faïencerie
Luxembourg, 1511
Luxembourg

Universite du Luxembourg

L-1511 Luxembourg
Luxembourg

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