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Endogenous trade policy under foreign direct investment

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  • Konishi, Hideo
  • Saggi, Kamal
  • Weber, Shlomo

Abstract

Using Bernheim and Whinston (1986) common agency game, we endogenize trade policy in a duopoly composed of a domestic firm and a foreign firm, where both firms influence the domestic government’s trade policy via their contributions. The foreign firm can jump over trade restrictions by undertaking foreign direct investment (FDI) in the domestic market. The government prefers a voluntary export restraint (VER) to a tariff for two reasons. First, a VER leads to higher contributions from the foreign firm than a tariff. Second, a VER provides a higher level of protection to the domestic firm without generating FDI by the foreign firm.
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Suggested Citation

  • Konishi, Hideo & Saggi, Kamal & Weber, Shlomo, 1999. "Endogenous trade policy under foreign direct investment," Journal of International Economics, Elsevier, vol. 49(2), pages 289-308, December.
    • Handle: RePEc:eee:inecon:v:49:y:1999:i:2:p:289-308
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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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