Jota Ishikawa, Hitotsubashi University

Abstract

In a two-country model, we examine location choices by two domestic firms when they serve only domestic market and their cost structures are different. Whether the firm, that has more incentive for foreign direct investment, is more efficient or less efficient than the other depends on the difference between domestic and foreign marginal costs and the presence of fixed costs. We may have multiple equilibria. A small change in trade costs may reverse plant locations. Moreover, a decrease in trade costs may reduce domestic welfare.