Hymer's multinationals

Stephen Hymer (1960, 1976) argues that a desire to increase market power is a strong motive for foreign takeovers. Yet the market-power motive for FDI flows has been largely unexplored in the modern theory of heterogeneous firms. This paper shows that foreign direct investment can increase markups under Bertrand competition when firms are heterogeneous, even when no strategic motive is possible. It then outlines two cases arising purely due to trade barriers in which a desire to increase markups in either the source or host country can compel a firm to set up a foreign affiliate, identifying a Hymer-Neary effect in the process.