Foreign direct investment, input prices, and host country welfare

Kuo-Feng Kao and Chin‐Sheng Chen

Review of International Economics, 2019, vol. 27, issue 1, 36-60

Abstract: This paper analyzes a multinational firm’s foreign direct investment decision, through either greenfield investment or cross‐border merger and acquisition, into a host country with an input monopoly that adopts either uniform pricing or discriminatory pricing. The optimal foreign entry mode could differ under each pricing policy. Under Cournot competition, firms’ technological gap and the initial local market structure are critical to the choice of foreign entry mode, whereas product substitutability is important under Bertrand competition. In the presence of foreign entry, this paper also examines the welfare effects of input price discrimination for the host country.

Date: 2019
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