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FOREIGN DIRECT INVESTMENT IN A TWO-TIER OLIGOPOLY: COORDINATION, VERTICAL INTEGRATION, AND WELFARE

Ping Lin and Kamal Saggi
International Economic Review
Vol. 52, No. 4 (November 2011), pp. 1271-1290
Stable URL: http://www.jstor.org/stable/41349195
Page Count: 20
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
FOREIGN DIRECT INVESTMENT IN A TWO-TIER OLIGOPOLY: COORDINATION, VERTICAL INTEGRATION, AND WELFARE
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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.

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