GEP Research Paper 04/25
Foreign Direct Investment Under R&D Competition
Arijit Mukherjee
Abstract
We consider the preferences of a foreign firm and a welfare maximizing host country government for foreign direct investment through direct entry and acquisition in presence of innovation by the firms. We find that relatively superior technology is always used under acquisition. Though profits are higher under acquisition, consumers are better off under direct entry, which creates a tension on the host country welfare. The host country welfare is higher under acquisition if the bargaining power of the foreign firm and the slope of the marginal cost of R&D are sufficiently low. Otherwise, the host country welfare is higher under direct entry.
Issued in October 2004.
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