Theoretical essays on trade policies, mergers and foreign direct investment

This thesis is a collection of theoretical essays in the area of trade policies, mergers and foreign direct investment. We employ partial equilibrium analysis to investigate various issues concerning the above topic. In the first chapter we review theoretical works that investigate the links between trade policy and merger activity. We focus our attention on Falvey (1998) which analyses the effects of tariff policy on mergers and reaches the conclusion that tariffs tend to encourage mergers involving small firms based in the restricting country but discourage mergers involving small firms based in the non-restricting country. In the second chapter we extend Falvey (1998) to include the effects of the quotas on merger profitability. The quotas tend to discourage mergers involving small firms from both restricting and non restricting countries. When a ranking of the tariff and the quota regimes can be made, mergers gains are larger under the equivalent quota regime. In the third chapter we investigate tariff and quota equivalence when firms have the option of direct investment. High tariffs induce a foreign firm to switch from trade to investing directly in the home country. Restrictive quotas, however, induce a foreign firm to engage in direct foreign investment in addition to trade. The two regimes are not always equivalent especially in terms of the level of imports. In the fourth chapter we use game theory to investigate the interaction between welfare maximising home government and a foreign firm capable of choosing the direct foreign investment option. If the foreign firm move first, it may pre-empt the home government by committing to the direct investment option if the optimal tariff is expected to be high. If the home government move first, it may need to set the tariff below the optimal level so that direct foreign investment is not induced