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Welfare, home market effects, and horizontal foreign direct investment

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  • K Behrens
  • P M Picard
Abstract
We investigate the spatial distribution and organization of an imperfectly competitive industry when firms may choose to operate more than a single production unit. Focusing on a short-run setting with a fixed mass of firms, we fully characterize the spatial equilibria analytically. Comparing the equilibrium and the first-best, we show that both organizational and spatial inefficiencies may arise. In particular, when fixed costs are low enough the market outcome may well lead to overinvestment and, therefore, to too many multinationals operating from a social point of view. Furthermore, once multinationals are taken into account, the market outcome may well lead too little agglomeration.
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Suggested Citation

  • K Behrens & P M Picard, 2005. "Welfare, home market effects, and horizontal foreign direct investment," Economics Discussion Paper Series 0519, Economics, The University of Manchester.
    • Handle: RePEc:man:sespap:0519
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    File URL: http://hummedia.manchester.ac.uk/schools/soss/economics/discussionpapers/EDP-0519.pdf
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    References listed on IDEAS

    as
    1. Kristian Behrens & Pierre M. Picard, 2007. "Welfare, home market effects, and horizontal foreign direct investment," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(4), pages 1118-1148, November.
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Ronald B. Davies & Hartmut Egger & Peter Egger, 2010. "Profit taxation and the mode of foreign market entry," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 43(2), pages 704-727, May.
    2. Hayakawa, Kazunobu & Tsubota, Kenmei, 2022. "The impact of highways on commodity prices: The price of butter in Japan," Journal of Asian Economics, Elsevier, vol. 81(C).
    3. Gokan, Toshitaka & Kichko, Sergey & Thisse, Jacques-François, 2019. "How do trade and communication costs shape the spatial organization of firms?," Journal of Urban Economics, Elsevier, vol. 113(C).
    4. Kenmei Tsubota, "undated". "Location and organization choice of firms," KIER Working Papers 679, Kyoto University, Institute of Economic Research.
    5. Kristian Behrens & Pierre M. Picard, 2007. "Welfare, home market effects, and horizontal foreign direct investment," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(4), pages 1118-1148, November.
    6. Kato, Hayato, 2015. "Lobbying and Tax Competition in an Agglomeration Economy: A Reverse Home Market Effect," CCES Discussion Paper Series 56, Center for Research on Contemporary Economic Systems, Graduate School of Economics, Hitotsubashi University.
    7. Hisamitsu Saito, 2015. "Firm Heterogeneity, Multiplant Choice, And Agglomeration," Journal of Regional Science, Wiley Blackwell, vol. 55(4), pages 540-559, September.
    8. Hayato Kato, 2018. "Lobbying and tax competition in an oligopolistic industry: a reverse home-market effect," Spatial Economic Analysis, Taylor & Francis Journals, vol. 13(3), pages 276-295, July.
    9. Fabio CERINA & MORITA Tadashi & YAMAMOTO Kazuhiro, 2015. "Trade Integration, Welfare, and Horizontal Multinationals: A three-country model," Discussion papers 15109, Research Institute of Economy, Trade and Industry (RIETI).
    10. Barbero, Javier & Behrens, Kristian & Zofío, José L., 2018. "Industry location and wages: The role of market size and accessibility in trading networks," Regional Science and Urban Economics, Elsevier, vol. 71(C), pages 1-24.

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    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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