if it is negative, the multinational may still choose to locate a single plant rather than
exporting, if the net gains from having an export platform within the union are positive. The
profits in this regime are given by an expression similar to (31):
∏f7 = πβ-/+(n-l)π[τ,(n-l)τ] (34)
Hence:
∏w - ∏x = (35)t,^t,∏ + χ(ζτ) (35)
where γD1(t,τ,f ), the tariff-jumping gain from establishing a single plant which leads to a local
duopoly, is defined by obvious analogy with (32). In this case too, therefore, lower internal
tariffs make exporting less attractive and FDI with only one plant relatively more attractive.
Moreover, the relatively high internal tariff insulates the multinational to some extent from
competition from other union firms.
The conclusions of this sub-section are illustrated in Figure 4. As already noted,
reductions in τ cause the O region to expand at the expense of the X region and possibly of
the F1 region. In addition, the F1 region expands at the expense of both the X and Fn
regions. This tendency reaches its limit when internal tariffs are completely abolished. In
that case the X region contracts to its smallest extent, as the prohibitive external tariff reaches
its lowest level of 1/(n+1). In addition, the Fn region vanishes, since there is no justification
for more than one union plant.
3.4 Conclusion
To conclude this section, it is clear that the presence of incumbent domestic firms
modifies the results of Section 2 in a number of respects. Not surprisingly, they reduce the
profitability of both exporting and FDI, for any given configuration of internal and external
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