Imperfect competition, productivity differences and proximity-concentration trade-offs

Andrzej Cie?lik


In this paper we study how productivity differences between foreign and home country firms affect the proximity-concentration trade-off in two imperfectly competitive frameworks: the Cournot duopoly and the monopoly that occurs when one of the competing firms is driven out of the market. We identify the conditions necessary for exporting and foreign direct investment (FDI), depending on the competing firms marginal cost differences as well as the trade cost and the fixed sunk cost of FDI. We demonstrate that five possible equilibria: an incumbent monopoly equilibrium, a FDI duopoly equilibrium, a FDI monopoly equilibrium, an exporting duopoly equilibrium and an exporting monopoly equilibrium, may emerge depending on various combinations of the key parameters of the model.


Aw B., Chung S., Roberts M. (1998) Productivity and the decision to export: microevidence from Taiwan and South Korea. NBER working paper #6658.

Barba Navaretti G., Venables A. (2004) Multinational Firms in the World Economy. Princeton University Press, Princeton.

Bernard A., Jensen J.B. (1999) Exceptional export performance: cause effect or both? Journal of International Economics 47:1-25.

Bernard A., Eaton J., Jensen J.B., Kortum S. (2003) Plants and productivity in international trade. American Economic Review 93:1268-1290.

Bernard A., Jensen J.B., Redding S.J., Schott P.K. (2007) Firms in international trade. Journal of Economic Perspectives 21:105-130.

Brander J. (1981) Intra-industry trade in identical commodities. Journal of International Economics 11:1-14.

Brander J. Krugman P. (1983) A 'reciprocal dumping' model of international trade. Journal of International Economics 15:313-321.

Caves R. (2007) Multinational Enterprise and Economic Analysis, 3rd Edition. Cambridge University Press, Cambridge.

Clerides S.K., Lach S., Tybout J.R. (1998) Is learning by exporting important? Micro-dynamic evidence from Colombia, Mexico and Morocco. Quarterly Journal of Economics 113:903-948.

Cie?lik A. (2015) Export versus FDI in Cournot duopoly framework, Institute of Economic Research Working Paper 11/2015.

Cie?lik A., Ryan M. (2009) Firm heterogeneity, foreign market entry mode and ownership choice. Japan and the World Economy 21:213-218.

Cie?lik A., Ryan M. (2012) Productivity differences and foreign market entry in an oligopolistic Industry, Open Economies Review 23 (3): 531-557.

Copithorne L. (1971) International corporate transfer prices and government policy. Canadian Journal of Economics 4:324-341.

De Backer K., Sleuwagen L. (2003) Does foreign direct investment crowd out domestic entrepreneurship? Review of Industrial Organization 22:67-84.

Doms M.E., Jensen J.B. (1998) Comparing wages skills and productivity between domestically and foreign owned manufacturing establishments in the United States. In: Baldwin R., Lipsey R, Richardson J.D. (eds.) Geography and Ownership as Basis for Economic Accounting. University of Chicago Press, Chicago.

Eaton J., Kortum S. (2002) Technology, geography and trade. Econometrica 70:1741-1779.

Grossman G., Helpman E. (2004) Managerial incentives and the international organization of production. Journal of International Economics 63:237-262.

Helpman E., Melitz M., Yeaple S. (2004) Export versus FDI with heterogeneous firms. American Economic Review 94:300316.

Helpman E. (2006) Trade, FDI and the organization of firms. Journal of Economic Literature 44:589-630.

Hirsch S. (1976) An international trade and investment theory of the firm. Oxford Economic Papers 28:258-269.

Horst T. (1971) The theory of the multinational firm: optimal behavior under different tariff and tax rules. Journal of Political Economy 79:1059-1072.

Krugman P. (1980) Scale Economies, product differentiation and the pattern of trade. American Economic Review 70:950-959.

Markusen J. (2002) Multinational Firms and the Theory of International Trade. MIT Press, Cambridge MA.

Melitz M. (2003) The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica 71:1695-1725.

Neary P.J. (2008) Trade Costs and Foreign Direct Investment. In: Brakman S, Garretsen H (eds.) Foreign Direct Investment and the Multinational Enterprise, MIT Press, Cambridge MA.

Pffaffermayer M., Bellak C. (2002) Why Foreign-Owned are

Different: A Conceptual Framework and Empirical Evidence for Austria. In: Jungnickel R (ed.) Foreign-Owned Firms: Are They Different? Palgrave-MacMillan, Houndsmill.



  • There are currently no refbacks.