Vertical foreign direct investment, welfare, and employment

Abstract

This paper shows that vertical foreign direct investemt will reduce prices but the aggregate welfare effect is unambiguaously 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 ficed, 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.