A BEJEAP Topics article.

Abstract

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.

Submitted: February 24, 2004 · Accepted: September 14, 2004 · Published: February 7, 2005

Originally published in Topics in Economic Analysis & Policy.

Recommended Citation

Elberfeld, Walter; Götz, Georg; and Stähler, Frank (2005) "Vertical Foreign Direct Investment, Welfare, and Employment," Topics in Economic Analysis & Policy: Vol. 5 : Iss. 1, Article 3.
Available at: http://www.bepress.com/bejeap/topics/vol5/iss1/art3