POLITICAL CONTRIBUTIONS, FOREIGN DIRECT INVESTMENT AND MERGERS

M. Özgür KAYALICA (Sakarya University)
Rafael E. RAMREZ (University of Guadalajara)

We examine the effects of mergers and internal groups (lobbies) in shaping national policies towards foreign direct investment. Lobbying is modeled following the political contributions approach. In this work we develop a partial equilibrium model of an oligopolistic industry in which a number of domestic and foreign firms compete in the market for a homogeneous good in a host country. It is assumed that the number of foreign firms is endogenous and can be affected by government policy in the host country. Domestic firms offer political contributions to the government that are tied to the government's policy choices. Then, the government sets the policy (subsidies) to maximize a weighted sum of total contributions and aggregate social welfare. It is also assumed that there is unemployment in the host country. We show that both contributions and mergers may change the policy outcome considerably.