Endogenous FDI Spillovers: Do You Want to Keep Your Recipe to Yourself?

This paper aims to explore the role of spillovers in the strategic choice for a MNE in a duopoly model, especially focusing on endogenous FDI spillovers with spillover-prevention costs. After discussing the exogenous spillover case, this paper shows that with a quadratic spillover-prevention cost function, the FDI-performing firm may choose a positive level of spillovers, which is lower than the exogenous level, and also shows the determinants of such optimal spillovers and how endogenizing spillovers affect the home firm’s decision on plant location. As extensions of the model, this paper explores a n-FDI-performing firm case and a m-FDI-host-country firm case separately, and shows that as the numbers of the FDI-performing firms goes infinity, the cutoff value of trade cost converges to that with exogenous spillovers. On the other hand, this paper shows that as the numbers of the foreign firms goes infinity, the cutoff value of trade cost can be either larger or smaller than that with exogenous spillovers. In the m-FDI-host-country firm case, numerical examples show that spillover-prevention cost is an important factor and that the effects of the number of FDI host country firms on the level of spillovers and the cutoff value of trade cost are not monotonic