Trade and FDI liberalization in a general oligopolistic equilibrium

- We develop a general oligopolistic equilibrium model.
- The effects of trade and FDI liberalization are examined.
- Trade liberalization alone may be welfare-reducing.
- FDI liberalization is necessarily welfare-improving.
- Simultaneous liberalization of trade and FDI is welfare-improving.

Incorporating recent evidence that FDI firms are more efficient than exporters into a general oligopolistic equilibrium model, this paper examines the welfare effects of trade and FDI liberalization. We find that trade liberalization alone is beneficial if the difference in marginal cost between the exporting and FDI industries is small enough while FDI liberalization unambiguously improves welfare. Combining these results, we further show that simultaneous liberalization of trade and FDI necessarily turns out welfare-improving.