International trade and strategic choice of capacity

  1. Quan Dong 1
  2. Juan Carlos Bárcena-Ruiz 2
  1. 1 South China Normal University
    info

    South China Normal University

    Cantón, China

    ROR https://ror.org/01kq0pv72

  2. 2 Universidad del País Vasco/Euskal Herriko Unibertsitatea
    info

    Universidad del País Vasco/Euskal Herriko Unibertsitatea

    Lejona, España

    ROR https://ror.org/000xsnr85

Revue:
Revista de economía aplicada

ISSN: 1133-455X

Année de publication: 2016

Volumen: 24

Número: 72

Pages: 5-21

Type: Article

DIALNET GOOGLE SCHOLAR

D'autres publications dans: Revista de economía aplicada

Résumé

This paper analyzes how investment in production capacity by firms influences their decision on whether to engage in FDI or export. Firms have two options as to how to serve a foreign market: (i) to export products to that market, paying a trade cost; and (ii) to produce there by engaging in FDI, incurring a fixed cost. We find that the range of parameters under which firms choose to export rather than to engage in FDI is greater when firms invest in capacity than when they do not. This contrasts with the result obtained when firms invest in R&D, when their investment encourages them to engage in FDI. There are cases where the mode of foreign expansion preferred by firms does not maximize joint welfare. We find that governments can get firms to adopt the right mode of foreign expansion by discouraging the other mode with a high enough fixed tax or fee.

€ Voir financement

Information sur le financement

Financial support from Ministerio de Ciencia y Tecnología (ECO2012-32299, ECO2015-66803-P), Basque Government (IT1124-16) and the University of the Basque Country (EHU14/05) is gratefully acknowledged.

Financeurs

Références bibliographiques

  • Bárcena-Ruiz, J.C. and M.B. Garzón (2007): "Capacity Choice in a Mixed Duopoly under Price Competition", Economics Bulletin, vol. 12, pp. 1-7.
  • Bárcena-Ruiz, J.C. and M.B. Garzón (2010): "Endogenous Timing in a Mixed Duopoly with Capacity Choice", The Manchester School, vol. 78, pp. 93-109.
  • Bárcena-Ruiz, J.C. and M.B. Garzón (2014): "Relocation and Investment in R&D by Firms", Portuguese Economics Journal, vol. 13, pp. 25-38.
  • Goldberg, P.K. (1995): "Strategic Export Promotion in the Absence of Government Precommitment", International Economic Review, vol. 36, pp. 407-426.
  • Head, K. and J. Ries (2003): "Heterogeneity and the FDI versus Export Decision of Japanese Manufacturers", Journal of the Japanese and International Economies, vol. 17, pp. 448-467.
  • Helpman, E., M.J. Melitz and S.R. Yeaple (2004): "Exports versus FDI with Heterogeneous Firms", American Economic Review, vol. 94, pp. 310-316.
  • Horiba, Y. and S. Tsutsui (2000): "International Duopoly, Tariff Policy and the Superiority of Free Trade", Japanese Economic Review, vol. 51, pp. 207-220.
  • Janeba, E. (2002): "Attracting FDI in a Politically Risky World", International Economic Review, vol. 43, pp. 1127-1155.
  • Leahy, D. and S. Pavelin (2008): "Playing Away to Win at Home", Journal of Economics and Business, vol. 60, pp. 455-468.
  • Lu, Y. and S. Poddar (2005): "Mixed Oligopoly and the Choice of Capacity", Research in Economics, vol. 59, pp. 365-374.
  • Lu, Y. and S. Poddar (2009): "Endogenous Timing in a Mixed Duopoly and Private Duopoly-‘Capacity then Quantity’ Game: the Linear Demand Case", Australian Economic Papers, vol. 48, pp. 138-150.
  • Lucas, R.E. (1990): "Why Doesn’t Capital Flow from Rich to Poor Countries?", American Economic Review, vol. 80, pp. 92-96.
  • Maggi, G. (1996): "Strategic Trade Policies with Endogenous Mode of Competition", The American Economic Review, vol. 86, pp. 237-258.
  • Markusen, J.R. (2002): Multinational Firms and the Theory of International Trade, Cambridge, MIT Press.
  • Matsumura, T. (2004): "Strategic Complementarity in Direct Investments", Review of Development Economics, vol. 8, pp. 583-596.
  • Mattoo, A., M. Olarreaga and K. Saggi (2004): "Mode of Foreign Entry, Technology Transfer, and FDI Policy", Journal of Development Economics, vol. 75, pp. 95-111.
  • Mody, A. (2004): "Is FDI Integrating the World Economy?", The World Economy, vol. 27, pp. 1195-1222.
  • Mukherjee, A. and K. Suetrong (2012): "Trade Cost Reduction and Foreign Direct Investment", Economic Modelling, vol. 29, pp. 1938-1945.
  • Nishimori, A. and H. Ogawa (2004): "Do Firms always Choose Excess Capacity?", Economics Bulletin, vol. 12, pp. 1-7.
  • Norbäck, P.J. (2001): "Multinational Firms, Technology and Location", Journal of International Economy, vol. 54, pp. 449-469.
  • Petit, M-L. and F. Sanna-Randaccio (2000): "Endogenous R&D and Foreign Direct Investment in International Oligopolies", International Journal of Industrial Organization, vol. 18, pp. 339-367.
  • Sanna-Randaccio, F. (2002): "The Impact of Foreign Direct Investment on Home and Host Countries with Endogenous R&D", Review of International Economics, vol. 10, pp. 278-298.
  • Vives, X. (1986): "Commitment, Flexibility and Market Outcomes", International Journal of Industrial Organization, vol. 4, pp. 217-229.
La source de données: Dialnet