Competition and allocation for foreign direct investment: The role of country size, production efficiency and market structure

This dissertation analyzes the competition between two host countries for foreign direct investment (FDI) and the allocation of FDI. There are three chapters, and they examine the effects of country size, production efficiency of domestic firms, and market structure on the multinational corporations' foreign direct investment decisions under two scenarios: domestic firms export and they do not.; Chapter 2 studies a multinational corporation's FDI decision when the foreign firm faces competition from domestic firms for the domestic market. Both countries employ lump-sum profit subsidies to attract FDI. Three variants of the model are developed and each focuses on one asymmetry between the two potential host countries: (1) country size; (2) production efficiency of domestic firms; and (3) market structure, viz, the number of domestic firms in each country. The multinational corporation chooses where to locate. Our findings include: (1) when domestic firms do not export, FDI is located in the bigger country if the transportation cost is insignificant. Otherwise, it invests in the small country. However, if domestic firms also export, the bigger country will always get FDI; (2) when domestic firms do not export, the country with a less efficient domestic firm receives FDI. Once domestic firms start to export, FDI would be indifferent between investing in either country; (3) the country with fewer domestic firms gets FDI.; The difference between the model in chapter 2 and chapter 3 is that the trade cost is the optimal tariff set by the government of each country, but not transportation cost. We find that the role of market structure is qualitatively the same as in chapter 2. However, here FDI is located in the country which is bigger although it imposes higher tax; and where the domestic firm is less efficient.; Chapter 4 investigates a number of multinational corporations' simultaneous investment decisions. We find that: (1) more than half of multinational corporations choose to invest in the bigger country; (2) the influence of production efficiency among domestic firms is ambiguous. When the domestic firms do not export, the less efficient country can attract more FDI. Otherwise, half of multinational corporations invest in each country; (3) more multinational corporations will invest in the country in which the market is less competitive.