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Foreign entry and domestic welfare: lessons for developing countries

Author

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  • Aditya Bhattacharjea

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.

Suggested Citation

  • Aditya Bhattacharjea, 2001. "Foreign entry and domestic welfare: lessons for developing countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 11(2), pages 143-162.
    • Handle: RePEc:taf:jitecd:v:11:y:2001:i:2:p:143-162
    DOI: 10.1080/09638190010110721
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    References listed on IDEAS

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    1. Martin Richardson, 1998. "Foreign entry and domestic welfare," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 134(2), pages 250-262, June.
    2. Paul E. Jensen & Kala Krishna, 1996. "Entry Policy in an Open Economy," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 31(1), pages 41-56, January.
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    Cited by:

    1. Daniel Gonzalez Olivares & Rafael Salvador Espinosa Ramirez, 2018. "Inversion extranjera directa y fusiones domesticas en presencia de productos diferenciados: Un analisis de bienestar social y politica publica," EconoQuantum, Revista de Economia y Finanzas, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 15(1), pages 73-98, Enero-Jun.
    2. Federico Etro, 2014. "Optimal Trade Policy under Endogenous Foreign Entry," The Economic Record, The Economic Society of Australia, vol. 90(290), pages 282-300, September.
    3. Kayalica, Ozgur M. & Espinosa-Ramirez, Rafael S., 2009. "Brotherhood of competition: Foreign Direct Investment and domestic mergers," International Review of Economics & Finance, Elsevier, vol. 18(1), pages 63-69, January.
    4. Adugna Lemi, 2004. "Foreign Direct Investment, Host Country Productivity And Export: The Case Of U.S. And Japanese Multinational Affiliates," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 29(1), pages 163-187, June.
    5. Federico Etro, 2012. "Endogenous Market Structures and International Trade. II: Optimal Trade Policy," Working Papers 2012:32, Department of Economics, University of Venice "Ca' Foscari".

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