||This paper considers a vertical-related model with domestic upstream firms, domestic downstream firms, and one foreign downstream firm. We want to investigate how entry of the foreign firm will affect the domestic social welfare if the foreign firm adopts FDI into the domestic final good market.|
The three major findings of the paper are as follows: Firstly, when there is an intermediate good market in the domestic country, the foreign firm’s entry may be beneficial to the domestic downstream firm but harmful to the upstream firm. Secondly, if the upstream and downstream market structures are close to monopoly, then foreign firm’s entry may be beneficial to domestic social welfare. This result is quite different from the situation that there is no upstream market in the domestic country. Finally, if the upstream and downstream markets are more competitive, the domestic country welcomes not only the more efficient but also the less efficient foreign firm entry. This result is also quite different from the previous literatures that don’t take intermediate goods into consideration.
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