Temporal Clusters in Foreign Direct Investment

Foreign Direct Investment (FDI) occurs in temporal clusters. In contrast to the existing literature, which explains these clusters as being a result of oligopolistic reaction, this paper presents a two-by-two-by-two general equilibrium model of companies which engage in monopolistic competition. These companies can serve a foreign market through exports or by producing abroad. With falling transport and communication costs, the internationalisation of production becomes profitable and, thus, multinational enterprises (MNE) emerge. In this process, FDI of companies from one country occurs in clusters, because an FDI of one company increases the profitability of FDI of any other national competitor.