Abstract

GONZALEZ OLIVARES, Daniel  and  ESPINOSA RAMIREZ, Rafael Salvador. Foreign direct investment and domestic mergers in the presence of differentiated products: An analysis of social welfare and public policy. EconoQuantum [online]. 2018, vol.15, n.1, pp.73-98. ISSN 2007-9869.  https://doi.org/10.18381/eq.v15i1.7113.

In this paper we analyze the effects of mergers on welfare of a host foreign direct investment country. Using a partial equilibrium model with imperfect competition, domestic and foreign firms compete among them producing differentiated goods. The domestic government sets discriminatory subsidies between domestic and foreign firms. As a first result, the optimal subsidy applied to foreign firms is negative affecting the consumer and producer surplus, as well as the revenue/expense policy.

When domestic firms merge as a response to foreign competition, in order to obtain competitive advantage, the effect on welfare is ambiguous. In the case of a negative impact of merger, the government subsidizes foreign firms. Finally, with a higher level of differentiation the domestic welfare increases, in his sense the consumers preferences are relevant.

Keywords : Foreign direct investment; horizontal mergers; imperfect substitutes; differentiated goods; imperfect competition; G34; H21; D61.