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Discussion Paper Details

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Title: Market Size, Product Differentiation and Bidding for New Varieties

Author(s): Jie Ma and Ian Wooton

Publication Date: March 2017

Keyword(s): FDI, import substitution, market size, MNEs and product differentiation

Programme Area(s): International Trade and Regional Economics

Abstract: We analyse a firm's investment decision in a regional economy composed of two countries. The firm already manufactures a horizontally differentiated good in the region and we determine the firm's equilibrium location choice for the new good and the welfare consequences of fiscal competition between the two countries. The outcome is the result of interactions among market-size, product-differentiation, and import-substitution effects. The first two effects represent the fundamental trade-off facing the firm. The third effect provides each country with an economic incentive to compete for the FDI. Past papers have addressed the market-size and import-substitution effects but, as far as we know, the product-differentiation effect is new to the literature.

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Bibliographic Reference

Ma, J and Wooton, I. 2017. 'Market Size, Product Differentiation and Bidding for New Varieties'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11943