Strategic intermediate goods pricing and foreign direct investment

This paper developed a vertically related market model containing an upstream supplier and numerous downstream firms in a host country. A multinational firm attempts to enter the host country's market. This study finds that even if the multinational firm has a lower production cost, once it enters the market via FDI, the optimal input price may decrease rather than increase. In addition, we find that FDI may benefit local downstream firms as opposed to harming them, even if the multinational firm is more efficient than local downstream firms. Lastly, an increase in the number of local downstream firms may not decrease the downstream firms' profits, may even increase.