Foreign Direct Investment and the Single Market

_ l-(n+l)⅛+C_t                     (16)

‘ ■        n÷2

where t_-k is the sum of the access costs of all firms excluding firm k. The results of
evaluating this equation explicitly for all three types of firm (multinational, local and partner-
country) in each of three FDI regimes (X, F1 and Fn) are given in Table 1.

Recall that each firm’s operating profits equal the square of its sales in a given market.
Hence, from (16), the main conclusion of this sub-section is that each firm’s operating profits
in market i are decreasing in its own access cost t_k, and increasing in the sum of the access
costs of its local competitors t_-k:

^πfc ^π⅛⁵*-fc)

A further property which proves useful later concerns the effects of a simultaneous change
in the access costs facing firm k and n-1 rival firms. It is clear from (16) that in this case
the direct effect dominates and so outputs and profits fall:

-                      dx, ∂x.          ∂x,

(18 = (n-l)t_k > _È=_È_+(n-l)^ < ₀          (18)

^d4 ^dt_k ∂t~_k

As shown in the Appendix, these properties also hold for a wide range of parameter values,
both in Cournot competition with general demands and in Bertrand competition with linear
demands. The Appendix also shows that the effect of rivals’ access costs diminishes as goods
become less close substitutes.

3.2 Equal Internal and External Barriers

Consider next the incentives faced by the potential multinational when internal and

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