DP137 | Strategic Investment, Multinational Corporations and Trade Policy

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Publication Date

01/11/1986

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Abstract

This paper presents a model of the multinational corporation focusing on a foreign firm which wishes to operate in a particular country. The firm must choose between direct investment and production in the country and production of the product elsewhere, followed by its export into the country concerned. The paper considers how government policy may influence this choice. Foreign direct investment may serve as a deterrent to entry, in the style of Dixit (1980). The effects of trade policy on foreign direct investment are very different in this oligopolistic model than in a competitive model. Depending on the nature of the oligopolistic equilibrium, tariffs may or may not induce foreign direct investment, they may or may not change the market structure, and they may have pro- or anti-competitive effects. In particular, it is possible for a tariff to deter foreign direct investment, contrary to the conventional wisdom.