Location for Foreign Direct Investment in Vertically Related Markets

Abstract

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Foreign direct investment in vertically related markets

“…In our main analysis, we have assumed that a bargaining pair's contract terms are not contingent on another pair's disagreement. In contrast, in line with Inderst and Wey (2003), de Fontenay and Gans (2005, 2014 and Bacchiega et al (2018), we allow now for contingency on disagreement. In the contingency case, if there is a breakdown in the negotiations between U and D i , the disagreement payoff of U arises from its negotiations with the rest of its downstream customers when they are aware of the breakdown in its negotiations with D i .…”

“…To the best of our knowledge, only a handful of theoretical papers study FDI in vertically related markets . These papers focus on issues related to the vertical technology transferred from the entering MNEs to the local suppliers and the subsequent free‐riding of the local firms (Pack and Saggi , Goh , Lin and Saggi , Balsvik ), the MNE's location choice (Ma , Milliou ), the interdependence between the MNEs’ entry decisions into different vertical production stages (Lin and Saggi ) and the local suppliers’ technology adoption incentives in the presence of technological incompatibilities between the MNEs and the domestic firms (Carluccio and Fally ) . An important feature that we share with these papers is the consideration of local input sourcing.…”

“…Assumption 1 is necessary and sufficient in order to avoid the non-existence of pure strategy pairwise proof equilibria. Non-existence may occur because pairwise proofness can lead to negative profits for the upstream monopolist, violating the individual rationality condition (McAfee and Schwartz 1995, Rey andVergé 2004 andMilliou andPetrakis 2007).…”

Foreign direct investment, input prices, and host country welfare

“…Carluccio and Fally () look at the relationship between upstream technology adoption and downstream foreign entry. Furthermore, in the context of vertically related markets, spillovers and vertical technology transfers via FDI have also been extensively analyzed—see, for example, Balsvik (), Lin and Saggi (), Ma (, ), Milliou (), and Milliou and Pavlou (), Pack and Saggi (), among others. In contrast to these papers, except for Milliou and Pavlou (), we allow for both greenfield investment and cross‐border M&A when analyzing the choice of foreign entry mode.…”

Foreign Direct Investment Modes and Local Backward Linkages

“…To the best of our knowledge, only a handful of theoretical papers study FDI in vertically related markets. 7 These papers focus on issues related to the vertical technology transfer from the entering MNE to the local suppliers and the subsequent free-riding of the domestic …rms (Pack and Saggi, 2001;Goh, 2005;Lin and Saggi, 2007;Balsvik, 2010), the MNE's location choice (Ma, 2012 andMilliou, 2013), the interdependence between the FDI entry decisions of MNEs into di¤erent vertical production stages (Lin and Saggi, 2011), and the local suppliers' technology adoption incentives in the presence of technological incompatibilities among the MNE and the domestic …rms (Carluccio and Fally, 2013). 8 An important feature that we share with these papers is that we assume that input sourcing takes place locally.…”