A political economy perspective on horizontal FDI in a dynamic Cournot-oligopoly with endogenous entry

Laszlo Goerke

doi:10.1016/j.ejpoleco.2020.101897

A political economy perspective on horizontal FDI in a dynamic Cournot-oligopoly with endogenous entry

Eur J Polit Econ. 2020 Jun:63:101897. doi: 10.1016/j.ejpoleco.2020.101897. Epub 2020 May 1.

Author

Laszlo Goerke^{1

2

3}

Affiliations

¹ Universität Trier, IAAEU (Institut für Arbeitsrecht und Arbeitsbeziehungen in der Europäischen Union), Campus II, D-54286, Trier, Germany.
² IZA, Bonn, Germany.
³ CESifo, München, Germany.

Abstract

Entry in a homogeneous Cournot-oligopoly is excessive if and only if there is business-stealing (Amir et al., 2014). The excessive entry prediction has been derived primarily for closed economies and using a welfarist benchmark. We extend this framework and allow for (1) horizontal FDI in a multi-period setting and (2) interest group-based government behaviour. Opening the market to greenfield investments from abroad tends to aggravate the entry distortion. Moreover, market opening may reduce welfare if a more pronounced entry distortion dominates the gain in consumer surplus. Finally, a government, which places sufficiently little weight on the interests of consumers, will object to market opening, even if welfare rises.

Keywords: Cournot-oligopoly; D 43; D 72; Excessive entry; F 21; Horizontal FDI; JEL; L 13; Political support function.