Strategic Complementarity in Direct Investments

The paper investigates a three-country duopoly model. Two developed countries have large markets and one developing country has a cost advantage. The author finds that strategic complementarity in location choice yields multiple equilibria. One is a cost-oriented agglomeration of firms in the developing country and the other is a market-oriented equilibrium where each firm locates in its developed home country. Also, private incentives for the cost-oriented location are excessive (resp. insufficient) from the viewpoint of world welfare if firms choose their locations non-cooperatively (resp. cooperatively). Copyright Blackwell Publishing Ltd 2004..