GEP Research Paper 02/22
Endogenous R&D and Entry in an International Oligopoly
B. Ferrett
Abstract
We present two models of the greenfield-FDI, R&D and entry decisions of rival firms in an international oligopoly. Specifically, we develop a blockaded-entry (BE) two-stage game as a benchmark: in the first stage, the two incumbents choose whether to undertake greenfield-FDI or R&D (or both); in the second stage, the firms compete à la Bertrand in two host countries. The potential-entry (PE) game includes the entry decision of a third firm immediately before the market stage. The games are solved backwards so that industrial structure becomes endogenous. Four principal conclusions emerge. First, relationships between industry greenfield-FDI flows and R&D spending, and structural parameters can be non-monotonic. Second, two-way relationships exist between firms' greenfield-FDI and R&D decisions. Third, equilibria in the PE game differ from those under BE because of equilibrium entry-deterrence and -accommodation. Fourth, the incumbents' equilibrium strategies towards entry under PE depend on the sunk costs of greenfield-FDI and R&D.
Issued in September 2002.
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