Foreign Direct Investment and the Single Market

The difference between the profits from establishing a single union plant and from
exporting now becomes:

∏^w-∏^x = Γ(ζτ√) ≡ γ¹α,τ√) + χ(r,τ)                ⁽³¹⁾

where both the tariff-jumping and export-platform gains are diluted by the extra competition
from union firms:¹²

γ¹(f,τ∕) ≡ π[O,(n-l)τ]-f- π[f,(ra-l)τ]

(32)
χ(ζτ) ≡ (n-l) { π[τ,(n-l)τ]-π[r,(n-l)τ] }

By contrast, establishing further plants yields only the tariff-jumping gain:

_π⅛ _{= π}⅛-1 _{+ γ}(_τJ∙)                       ⁽³³⁾

This is identical to equation (9) in Section 2 and so the implications are the same. The
lowering of internal tariffs may make it profitable to establish a single plant in the union,
since that plant can serve as an export platform, enjoying preferential access to all union
markets. However, if it is profitable to establish more than one plant, then it is profitable to
locate in every union country.

Finally, the case where internal tariffs τ are greater than ⅛ but less than ½ introduces
no new considerations. Now, firms from other union countries cannot compete in any third
market where the multinational locates. If the multinational is already established in the
union, the gains to it from setting up a new plant equal the gains from tariff-jumping leading
to a duopoly, defined in (24), but now evaluated at the internal tariff τ: γ^D(τ,f ). If this
expression is positive, then the multinational will locate plants in all n union countries. Even

¹² Note that the tariff-jumping gain from establishing a first plant in the union is more
complex than that from establishing additional plants. The two are related as follows: γ(τ,f )
= γ¹(τ,τ,f ).

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