Rules of origin and technology spillovers from foreign direct investment under international duopoly

Abstract

Using a simple three-country model of international duopoly, this study analyses the optimal choice of rules of origin (ROO) in a free trade area/agreement (FTA) when firms from outside the FTA must undertake foreign direct investment (FDI) in FTA countries and conduct part of their production process within the FTA to comply with the ROO. FDI causes spillovers of the superior production technology from a non-FTA firm to its competitor within the FTA, depending on how much of the production process is shifted to the FTA area. In this situation, we show that as the degree of multilateral trade liberalisation before formation of the FTA is higher, the optimal ROO tends to be less stringent.

Rules of origin and consumer‐hurting free trade agreements*

“…Extant theoretical studies have focused on how RoO change input sourcing (Ju and Krishna, 2005), the degree of market integration inside an FTA (Ishikawa et al, 2007), the productivity cut-off of exporting for users and non-users of FTA tariffs (Demidova and Krishna, 2008) and the patterns of foreign direct investment (Mukunoki, 2017). Jinji and Mizoguchi (2016a), Jinji and Mizoguchi (2016b) have analysed the optimal choice of RoO. However, these studies have not considered price manipulation to comply with RoO.…”

Conjectured Cournot Duopoly Model for the EU–US Automobile Trade: A Game Theoretic Analysis of the TTIP’s Most Traded Product

“…Such analyses are addressed, for example, in the study of Bagwell-Staiger (2009), Zizzimos (2011), or Soegaard (2013), who use extended versions of the models of Brander-Spencer (1984), and Yi (1996). However, Jinji-Mizoguchi (2015) have already examined the effect of rules of origin and technology spill-over in their oligopolistic approach. They used a three-Player model to demonstrate the optimal choice of rules of origin when one party is required to import FDI at the time of concluding a trade agreement.…”