Vertical Foreign Direct Investment, Welfare, and Employment
Georg GÃ¶tz and
Frank StÃ¤hler Additional contact information Walter Elberfeld: UniversitÃ¤t zu KÃ¶ln
Georg GÃ¶tz: University of Vienna
Frank StÃ¤hler: University of Otago
Authors registered in the RePEc Author Service: Georg Götz () and
Frank Stähler ()
This paper shows that vertical foreign direct investment will reduce prices but the aggregate welfare effect is unambiguously positive only under free market entry. Using a standard model of imperfect competition, we develop this result by considering two different cases. In the first case, the total number of firms is fixed, and we show that national and multinational firms may coexist. In the second case, we allow for market entry, and we focus on situations in which either only national or only multinational firms are active. Furthermore, we discuss impact effects on labor demand. We show that a decline in foreign wages increases domestic employment.