Welfare-Reducing Domestic Cost Reduction

8 Pages Posted: 2 May 2007

See all articles by Arijit Mukherjee

Arijit Mukherjee

University of Nottingham - School of Economics

Uday Bhanu Sinha

Indian Statistical Institute

Abstract

We show that cost reduction by a domestic firm may reduce domestic welfare if it changes a foreign firm's production strategy from foreign direct investment to export. Domestic cost reduction can be welfare reducing when the domestic market is sufficiently small and domestic firm's marginal cost of production is higher than the foreign firm's marginal cost of production under foreign direct investment, which is a usual feature of trade between developed and developing countries. So, developing countries with small domestic markets need competent competition policies when encouraging domestic innovation and also trying to attract foreign direct investment.

Suggested Citation

Mukherjee, Arijit and Sinha, Uday Bhanu, Welfare-Reducing Domestic Cost Reduction. Review of International Economics, Vol. 15, No. 2, pp. 294-301, May 2007, Available at SSRN: https://ssrn.com/abstract=983232 or http://dx.doi.org/10.1111/j.1467-9396.2006.00635.x

Arijit Mukherjee (Contact Author)

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom
+44 115 9514733 (Phone)
+44 115 9514159 (Fax)

Uday Bhanu Sinha

Indian Statistical Institute ( email )

203 B. T. Road
Kolkata, West Bengal 700108
India

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