Host market competition, foreign FDI and domestic welfare

- We study foreign entrant's FDI/export decision under fierce domestic competition.
- We show a greater host market competition may attract or deter FDI.
- We show higher host competition may reduce welfare without scale economies.
- We highlight implications for tax/subsidy design of foreign firm's entry decision.

This paper studies the impact on domestic welfare and a foreign firm's entry mode of a greater host market competition. We find that a stronger domestic competition may attract or deter FDI. We also show that higher domestic competition can raise domestic welfare either when it attracts FDI or when it does not affect the foreign firm's entry mode choice. Nonetheless, higher domestic competition may reduce domestic welfare if FDI is deterred. Our finding suggests that competition policy in the host country ought to be complemented by its foreign investment policy when foreign firm makes its FDI/export decision.