Premium
Strategic Complementarity in Direct Investments
Author(s) -
Matsumura Toshihiro
Publication year - 2004
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/j.1467-9361.2004.00254.x
Subject(s) - complementarity (molecular biology) , duopoly , economies of agglomeration , economics , incentive , welfare , microeconomics , developing country , strategic complements , strategic interaction , industrial organization , cournot competition , market economy , economic growth , genetics , biology
The paper investigates a three‐country duopoly model. Two developed countries have large markets and one developing country has a cost advantage. The author finds that strategic complementarity in location choice yields multiple equilibria. One is a cost‐oriented agglomeration of firms in the developing country and the other is a market‐oriented equilibrium where each firm locates in its developed home country. Also, private incentives for the cost‐oriented location are excessive (resp. insufficient) from the viewpoint of world welfare if firms choose their locations non‐cooperatively (resp. cooperatively).