Potential FDI causing large distortions in domestic production

Hisashi Sawaki

Research output: Contribution to journalArticle

Abstract

When a foreign firm enters a domestic market, either via exports or through foreign direct investment (FDI), one factor determining the most favourable entrance mode is the profitability of the market, which may not be directly observed by the foreign firm. If the domestic trade protection policy is within a certain range that causes the foreign entrant's decision to swing between the two entry modes, the final choice will depend on the foreign firm's belief about the profitability. In such a situation, a domestic incumbent firm wishing to prevent FDI will heavily distort its production downward to convince the foreign competitor that the market is not profitable. When making trade policy, such strategic behaviour on the part of the domestic firm should be taken into account.

Original languageEnglish
Pages (from-to)485-500
Number of pages16
JournalJournal of International Trade and Economic Development
Volume17
Issue number4
DOIs
Publication statusPublished - Nov 24 2008

Keywords

  • Exports
  • Foreign direct investment (FDI)
  • Oligopoly incomplete information
  • Signalling
  • Tariffs

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Development
  • Aerospace Engineering

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