Foreign Direct Investment and the Single Market

the dotted lines in Figure 5, which bound the values of φ and t consistent with profitable
location of different numbers of plants. (For t above the threshold level t, exports are zero
and so the loci defined by (37) are independent of t, and become horizontal lines.)

Next, assume that internal tariffs are reduced. If the multinational has no union plants,
then, just as in earlier sections, there is an additional export-platform gain from establishing
a single one. Extending the logic which led to (8), the profits from a single plant relative to
exporting equal:

II^z' U^x = γ[r∕(l,φ)] ÷ χ(t,τ)                        ⁽³⁸⁾

Once again, we can solve for the threshold value of the fixed cost parameter at which it is
just profitable to locate a single plant in the union:

γ[r,∕(l,φ)] + χ(r,τ) = 0     => φ = φ¹(t,τ)                  (39)

+ -

The crucial feature is that this is decreasing in τ. Hence a reduction in internal tariffs makes
it more attractive to locate a single plant in the union than to export to it.

By contrast, if the multinational has at least one union plant, then the gain from
establishing another one is given by (36) with τ replacing t. The threshold loci between
regions with different numbers of plants are therefore given by (37) with τ replacing t:

γ[τ₅∕(τn,φ)] =0     =»    φ=φ(τ,m),     zn=2,..n            (40)

+ -

Unlike (39), this is increasing in τ: as τ falls, it becomes profitable to locate fewer plants
within the union. Combining (39) and (40), as Figure 5 shows, the F1 region expands
relative to all three contiguous regions, while all the loci separating the regions where two
or more plants are optimal shift downwards as shown.

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