Market Entry and Foreign Direct Investment

Abstract

This paper discusses the impact of foreign direct investment (FDI) on market entry and welfare. It assumes that firms may enter markets in the first period as national firms only. In the second period, however, FDI is possible. The paper demonstrates that FDI reduces market entry because equilibrium profits in the second period decline with a decrease in the fixed cost of FDI. Therefore, compared to a trade regime without any FDI, prices rise in the first period but decline in the second period. The paper shows, however, that FDI will unambiguously improve the discounted sum of consumer surplus.foreign direct investment, multinational enterprises, imperfect competition, free entry