Impact of exports and foreign direct investment on the nature of competition in the United States food manufacturing industry
One of the most hotly debated topics in the area of international trade and foreign direct investment (FDI) in the past decade has been their impacts on U.S. competition. This has been prompted by two major surges in FDI in the United States since 1978. One of the central topics of debate has been to explain why a firm may use FDI to sell in a foreign market instead of alternatives such as exporting, licensing, or alliances. Since the late 1970's, a strand of literature has emerged that relies on basic concepts from theoretical industrial organization economics to present arguments that a firm may use FDI for strategic purposes. The bulk of the literature that attempts to explain the export/FDI trade-off is based on the assumptions that firms use whatever sales mode is cost minimizing or that the firm acts as a monopolist in the host country market. These models generally do not incorporate rivalry with host country firms.
A model was formulated to test the hypothesis that exports and FDI have different impacts on the nature of competition with domestically owned firms. A time-series structural model was derived and fitted to 1977-1987 data from the U.S. dried soup industry in order to estimate econometrically conjectural variation elasticities. The conjectural variation elasticities were then used to make inferences about the nature of competition between different strategic groups in an industry defined by the ownership status of firms. This is the first attempt to test empirically whether firms use FDI for strategic purposes.
The results show that the conduct between U.S. firms that use FDI and non-multinational firms is significantly more collusive than conduct between U.S. importers and non-multinational firms. Furthermore, the conduct between multinational firms and domestically owned firms is not symmetric; multinational firms behave more aggressively towards increases in output by domestically owned firms than domestically owned firms behave in response to increases in output by multinational firms. This implies that multinational firms may aggressively acquire market share once they establish a foreign subsidiary in the United States. The results of the model also suggest that the size of the export subsidy necessary to encourage firms to rely on exports instead of FDI to sell in a foreign market are larger than would be the case if the MNE has the same degree of market power in a host country through the use of exports or FDI.