ABSTRACT
Much of the literature on foreign investments examines firms facing the alternative between producing in or exporting to a third country.2 If trade barriers are raised in the host country, the incentive to set up production facilities there increases. This chapter focuses on foreign investments aimed at reducing costs of production. In this case, trade barriers are expected to slow down the incentive to restructure in the protected areas and, hence, reduce the incentive to redeploy to cheap labour countries. However, this assumption is based on a simplified world where all similar firms based in protected advanced countries compete against all similar firms based in cheap labour countries. If we introduce elements of differentiation between firms in both areas, our initial expectations no longer hold. Redeployment could be an optimal strategy for advanced countries’ firms, independent of the competitive threat from developing countries. In this case, trade policy has an asymmetric impact on protected firms. By increasing the cost of redeployment, it is biased against those firms which choose redeployment as their optimal strategy.
