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Managing Foreign Direct Investment: Commitment, Deterrence, And Diversion
Author(s) -
Conway Patrick,
Wang Daxin
Publication year - 1998
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.00039
Subject(s) - precommitment , foreign direct investment , multinational corporation , monopolization , economics , investment (military) , foreign portfolio investment , deterrence theory , domestic market , international economics , market economy , microeconomics , international trade , open ended investment company , return on investment , production (economics) , finance , macroeconomics , monopoly , physics , politics , political science , nuclear physics , law
The paper models the multinational choice between foreign direct investment in and exporting to a domestic market as an equilibrium outcome of strategic play between domestic and foreign firms. Two cases are considered, one in which the domestic firm can precommit to output levels (as, for example, through investment in a distribution network), and one in which such precommitment is not possible. The domestic firm's strategy in the case of precommitment includes aggressive efforts to deter or divert foreign investment and results in fewer observed equilibria with foreign investment than would otherwise occur. Tariffs designed to switch the foreign decision from exporting to direct investment may lead instead to monopolization of the market by the domestic firm.