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Trade costs, FDI incentives, and the intensity of price competition
Author(s) -
Gori Giuseppe Francesco,
Lambertini Luca,
Tampieri Alessandro
Publication year - 2014
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/ijet.12045
Subject(s) - economics , foreign direct investment , incentive , bertrand competition , offset (computer science) , marginal cost , microeconomics , international economics , free trade , competition (biology) , monetary economics , cournot competition , macroeconomics , oligopoly , ecology , biology , computer science , programming language
Contrary to theoretical predictions, empirical evidence shows that an increase in trade liberalization causes an increase in foreign direct investment. We propose an explanation for this apparent puzzle by exploiting Dastidar's approach, which delivers a continuum of Bertrand–Nash equilibria ranging above marginal cost pricing. We show that allowing for softer price competition may indeed more than offset the standard effect generated by a decrease in trade costs, thereby restoring foreign direct investment incentives.