Competing to Invest in the Foreign Market

This paper analyzes foreign-direct-investment (FDI) competition in a three-country framework: two Northern countries and one Southern country. We have in mind the competition of Airbus and Boeing (or GM and Volkswagen) in a developing country. The host-country government endogeneizes tariffs, while Airbus and Boeing choose domestic output and FDI. Wages and employment in the home countries are bargained over between labor and management. We find that in the unique equilibrium, both Airbus and Boeing compete to undertake FDI in the developing country. This arises because the host country can play off the multinational corporations, which in turn stems from three factors: (a) Oligopolistic rivalry; (b) Quid prod quo FDI, which reduces tariffs; (c) Strategic outsourcing-FDI drives down the union wages at home if the host-country wage is sufficiently low. However, if the host-country wage is sufficiently high, then the union wage increases under FDI. In such cases, FDI competition benefits the multinationals, the labor unions as well as the host country. If Boeing undertakes FDI while Airbus does not, then: (i) Boeing's market share and profits are higher than Airbus's; (ii) the tariff facing Boeing is lower than that facing Airbus.