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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Friebel, Guido / Mendola, Mariapia / Requate, Till / Tsui, Kevin / Wichardt, Philipp / Zulehner, Christine

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Vertical Foreign Direct Investment, Welfare, and Employment

Walter Elberfeld1 / Georg Götz2 / Frank Stähler3

1Universität zu Köln,

2University of Vienna,

3University of Otago,

Citation Information: The B.E. Journal of Economic Analysis & Policy. Volume 5, Issue 1, ISSN (Online) 1935-1682, ISSN (Print) 2194-6108, DOI: 10.1515/1538-0653.1280, February 2005

Publication History

Published Online:


This paper shows that vertical foreign direct investment will reduce prices but the aggregate welfare effect is unambiguously positive only under free market entry. Using a standard model of imperfect competition, we develop this result by considering two different cases. In the first case, the total number of firms is fixed, and we show that national and multinational firms may coexist. In the second case, we allow for market entry, and we focus on situations in which either only national or only multinational firms are active. Furthermore, we discuss impact effects on labor demand. We show that a decline in foreign wages increases domestic employment.

Keywords: Vertical foreign direct investment; multinational enterprises; imperfect competition; welfare; labor demand

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