Follow-my-leader FDI and collusion

Abstract

This paper presents a simple model to illustrate the following idea - domestic rivals may be motivated to setup foreign production in the same country because the replication of each other’s foreign direct investment (FDI) facilitates collusive behaviour in the market in which they compete. This implies positive interdependence between firms’ FDI decisions, i.e. foreign investment by one firm brings increased incentive for others to follow-suit. So, we highlight a mechanism that propagates FDI clusters - a flurry of investment from one country, or region, to another.