Endogenous market structures, FDI, and agglomeration of firms

This paper analyzes the impact of free-trade agreements (FTA) and customs unions (CU) on the location of a foreign firm. We consider a two-country model, where one of the countries already has a domestic private firm. A foreign firm chooses its location between these countries. We consider two cases: (i) each country sets its tariff rate endogenously; (ii) the tariff rate is exogenously given. The second case reflects FTA or CU creation. We show that in the first case the foreign firm locates at the country in which the domestic firm exists, but the converse holds in the second case