FDI in Services and Market Access: A Paradox of Trade Liberalization

In an international oligopoly model, this paper investigates interaction between trade liberalization in goods and liberalization in service FDI. Since some services are market-specific and have non-tradable nature, a foreign firm has a higher cost in service provisions compared to its domestic competitor and it can overcome the disadvantage by either outsourcing services to the domestic competitor or making service FDI. When the cost of service FDI is high enough, trade liberalization under service outsourcing may have an anti-competitive effect and benefit both domestic and foreign firms at the expense of consumers. A decline in the cost of service FDI makes this paradoxical effect less likely, and trade liberalization becomes procompetitive when the cost is low enough so that the foreign firm actually makes service FDI. ∗Corresponding author : Faculty of Economics, Hitotsubashi University, Kunitachi, Tokyo 186-8601, Japan; Fax: +81-42-580-8882; E-mail: [email protected]