Entry, Location and R&D Decisions in an International Oligopoly

We examine two questions, both motivated by an empirical regularity. First, when are incumbent firms' foreign direct investment (FDI) and R&D expenditures positively associated in equilibrium in an international oligopoly? We show that a positive association can be expected to exist only if most of the variation between observations represents market size differences: large markets support the sunk costs of both FDI and R&D. Second, when will incumbent firms in an international oligopoly use FDI to pre-empt entry into the industry by outside firms and thereby maintain concentration? We find that entry-deterring FDI is feasible only in intermediate-sized markets and that, due to free riding, it is underprovided in equilibrium from the viewpoint of the incumbent oligopoly