Equilibrium coalition structures in the presence of foreign direct investment

Hyejoon Im

The Journal of International Trade & Economic Development, 2009, vol. 18, issue 1, 139-167

Abstract: This paper incorporates foreign direct investment (FDI) into the examination of trading bloc formation with endogenously determined coalition structures. In so doing, we build a three-country model, in which firms serve foreign markets either by exporting or undertaking FDI, and consider a coalition formation game with the Coalition Proof Nash Equilibrium as an equilibrium concept. We find that the equilibrium coalition structure varies upon firms characterization before and after the formation of a trading bloc. As in the literature, when all firms are exporters in the pre- and post-formation, bilateralism can be an equilibrium outcome. However, when trade barriers are not so high as to be trade-prohibitive and the environment is favorable to multinational activities in the pre- or post-formation, only global free trade will prevail as an equilibrium coalition structure.

Keywords: trading blocs; FTA; multinational corporations; FDI; coalition formation game (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1080/09638190902757475

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