Discussion Paper No.1613

Abstract :
This paper explores the role of FDI-spillover prevention costs in the strategic choice for a MNE of a developed country about whether it perform FDI in an emerging economy and about a degree of FDI spillovers that it allows. After discussing the exogenous spillover case in a duopoly model, this paper shows that with a quadratic prevention cost function, the MNE may choose a positive level of spillovers lower than the benchmark exogenous level, and also shows how endogenizing spillovers affect the home firm’s decision on it’s plant location. In an oligopoly with one FDI-performing firm and more than one host-country firm, the effects of the number of hostcountry firms on the level of spillovers and the cutoff value of trade cost are not always monotonic. An welfare analysis shows that in the duopoly case, endogenizing FDI spillovers shifts down the range of the trade cost where FDI is desirable for both the FDI-performing firm and the foreign country from the exogenous spillover case.

Keywords : FDI, Endogenous Spillovers, Spillover-prevention Costs.

JEL code: F12, F23, O33.