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Foreign entry and domestic welfare: lessons for developing countries

Aditya Bhattacharjea ()

The Journal of International Trade & Economic Development, 2001, vol. 11, issue 2, 143-162

Abstract: This paper examines the effects of foreign entry, in the form of either imports or direct foreign investment, into an oligopolistic market. Incorporating a possible divergence between private and social costs, it first derives simple conditions under which foreign entry reduces welfare relative to autarky. Then, in a multi-firm Cournot model with linear demand and international cost asymmetries, it shows that foreign entry reduces welfare unless it captures a very large share of the home market. However, it also shows that an optimal tariff can prevent this welfare decline. Some suggestive empirical evidence and extensions to differentiated products and to merger analysis are offered. The paper concludes with implications for trade and investment liberalization, as well as for domestic and international competition policy.

Keywords: Direct Foreign Investment; Optimal Tariff; Oligopoly; Trade Liberalization; Strategic Trade Policy (search for similar items in EconPapers)
Date: 2001
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DOI: 10.1080/09638190010110721

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The Journal of International Trade & Economic Development is currently edited by Pasquale Sgro, David E.A. Giles and Charles van Marrewijk

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