Industrial Structure, Trade, and Foreign Direct Investment

This paper investigates some trade-investment structures between two countries with identical industry structure consisting of intermediates firms and final goods firms. In the former part of this paper, comparisons among trade regimes under the two countries model is made. The result concludes that wage rate under trade liberalization in a final goods sector becomes higher than under autarky policy of final goods sector. And the proposition is obtained that the best trade regime did not involve trade in final products. In the latter part of this paper, the possibility of mutual penetration of foreign investment under the game-theoretic framework is investigated. The result shows that the mutual foreign direct investment is realized as a Nash equilibrium and this is the case of a prisoner's dilemma. This conclusion may indicate that there is a room for the government to interfere the economy in terms of regulation policy of trade and foreign direct investments.