The Impact of Multinational Entry on Domestic Market Structure and R&D

We model the impact of different modes of multinational entry on the choices of domestic firms. Focusing on the competitive effects of foreign presence in the host country we demonstrate that greenfield investment will increase competition only if it is not countered by anti-competitive reactions on the part of the domestic firms. Considering also cross-border mergers and acquisitions the model, thus, provides two alternative explanations for the increase in concentration ratios in industries with mostly horizontal foreign direct investment. Moreover, foreign presence is shown to raise total investment in the local industry at the cost of crowding out domestic R&D.