Review of Industrial Organization 18: 363–378, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
Inward Investment and Host Country Market
Structure: The Case of the U.K.
Birmingham Business School, Birmingham University, Edgbaston, Birmingham B15 2TT, U.K.
Abstract. Multinational enterprises are seen as vehicles for the international transfer of invest-
ment capital, protecting and increasing proﬁts by transferring ownership advantages across national
boundaries. As such, the argument often follows that foreign direct investment then exacerbates the
monopoly problem in host countries, by increasing concentration and facilitating collusion. This
paper however reveals the reverse, that inward investment into the U.K. acts to reduce concentration
at the industry level, by increasing competitive pressures on domestic industry.
Key words: FDI, industry concentration.
JEL Classiﬁcations: F23, L11.
This paper examines the impact that foreign direct investment (FDI) has on host
country industry concentration. It seems to be now generally accepted that mul-
tinational enterprises (MNEs) act to exacerbate the monopoly problem in the host
country, through the exploitation of economies of scale, international vertical and
horizontal integration and the division of labour. There is however a competing
hypothesis, which this paper supports, that inward FDI is more likely to reduce
concentration by reducing the market shares of the leading host-country ﬁrms.
This paper is constructed as follows: Section II outlines the possible relationships
between FDI and market concentration, based on theoretical analysis and empirical
studies. The evidence here is rather contradictory, and so Section II contrasts the
ﬁndings of previous work. Section III develops a model of concentration change
along traditional lines, based on changes in the long run level of concentration,
as well as changes in a set of explanatory variables. Section IV addresses the
problems of developing suitable measures for inward FDI, and for industry concen-
Thanks are due to Keith Cowling, Uma Kambhampati, Jim Love, Mike Waterson, and other
delegates at the Network of Industrial Economists conference at Oxford for comments on an earlier
draft of this paper. Particular thanks are also due to William G. Shepherd and two anonymous referees
for their comments.