Working Paper: CEPR ID: DP3419
Authors: J. Peter Neary
Abstract: This Paper extends the theory of multinational corporations, identifying three distinct influences of internal trade liberalization by a group of countries on the level and pattern of inward foreign direct investment (FDI). First, the tariff-jumping motive encourages plant consolidation. Second, the export platform motive favours FDI with only a single union plant relative to exporting, and may induce a firm that has never exported to invest. Finally, reduced internal tariffs increase competition from domestic firms, which dilutes the other motives and may induce a ?Fortress Europe? outcome of multinationals leaving union markets even though external tariffs are unchanged.
Keywords: foreign direct investment; market integration; multinational corporations; single market
JEL Codes: F12; F15; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lower internal tariffs (F14) | Increased FDI (F21) |
| Tariff jumping motive encourages multinationals to consolidate plants within the union (F23) | Lower internal tariffs reduce costs associated with exporting from outside the union (F15) |
| Export platform motive favors FDI with a single union plant (F23) | As internal tariffs decrease, attractiveness of establishing a single plant that serves multiple markets increases (F12) |
| Increased competition from domestic firms due to reduced internal tariffs (F69) | Potentially leads to multinationals exiting union markets (F23) |