The strategic proximity-concentration trade-off with multiproduct multinational firms

Abstract

I study the proximity-concentration trade-off faced by two multiproduct multinational companies (MNCs) that operate in two countries under horizontal product differentiation. In this context, characterized by two-way trade and foreign direct investment, the trade-off regulates the domestic stock of investment (concentration) against the foreign stock (proximity) in a way that is centred around the exploitation of large market shares and market power. I show that MNCs follow pricing-to-market that mirrors the proximity-concentration trade-off, and I characterize how market shares, prices, and markups react to changes in investment and trade frictions. Endogenous variables turn out to be closely interrelated across markets and firms.