Foreign direct investment in a two-tier oligopoly : coordination, vertical integration, and welfare

Ping LIN, Kamal SAGGI

Research output: Journal PublicationsJournal Article (refereed)peer-review

6 Citations (Scopus)
35 Downloads (Pure)


We study foreign direct investment (FDI) by two independent investors/entrants into a two-tiered oligopolistic industry. An FDI subsidy at a single stage of production can be sufficient to resolve the coordination problem facing investors thereby inducing entry at both stages. However, due to linkage offsetting, FDI at both stages may yield lower domestic welfare than FDI at a single stage. Vertical integration not only solves the coordination problem, it also eliminates double marginalization. But since the integrated multinational does not sell the intermediate to local firms, its entry generates no vertical linkages and can yield lower welfare than FDI by independent firms.
Original languageEnglish
Pages (from-to)1271-1290
Number of pages20
JournalInternational Economic Review
Issue number4
Early online date23 Nov 2011
Publication statusPublished - Nov 2011

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