Title
Competing to Invest in the Foreign Market
Abstract
This paper analyzes foreign-direct-investment (FDI) competition in a three-country
framework: two Northern countries and one Southern country. We have in mind the competition of
Airbus and Boeing (or GM and Volkswagen) in a developing country. The host-country government
endogeneizes tariffs, while Airbus and Boeing choose domestic output and FDI. Wages and
employment in the home countries are bargained over between labor and management. We find that
in the unique equilibrium, both Airbus and Boeing compete to undertake FDI in the developing
country. This arises because the host country can play off the multinational corporations, which in
turn stems from three factors: (a) Oligopolistic rivalry; (b) Quid prod quo FDI, which reduces tariffs;
(c) Strategic outsourcing-FDI drives down the union wages at home if the host-country wage is
sufficiently low. However, if the host-country wage is sufficiently high, then the union wage
increases under FDI. In such cases, FDI competition benefits the multinationals, the labor unions as
well as the host country. If Boeing undertakes FDI while Airbus does not, then: (i) Boeing's market
share and profits are higher than Airbus's; (ii) the tariff facing Boeing is lower than that facing Airbus.
Laixun ZHAO
Research Institute for Economics and Business Administration
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501
Japan
Phone: (81) 78 803 7036
Fax: (81) 78 803 7059
Makoto OKAMURA
Department of Economics, Hiroshima University