Document Type : Research Paper
Authors
1 Department of Business Economics , Faculty of Economics , Allameh Tabatabai University
2 Department of Business Economics, Faculty Economics, Allameh Tabataba'i University, Tehran, Iran.
3 Associate Professor, Department of Business Economics, Faculty Economics, Allameh Tabataba'i University, Tehran, Iran.
4 Associate Professor Department of Business Economics, Faculty Economics, Allameh Tabataba'i University, Tehran, Iran.
Abstract
This theoretical study investigates the factors influencing the deterrence of foreign firm entry through strategic R&D investment by an incumbent domestic firm. Understanding this phenomenon, as an endogenous barrier potentially detrimental to free trade, is crucial for designing optimal national trade policies, particularly in the current context of rising global market concentration. We develop a comprehensive theoretical framework integrating theories from international trade and industrial organization, where investment in innovation plays a pivotal role. Within this model, we examine whether a domestic firm, following trade liberalization, might strategically utilize R&D investment as an entry barrier against potential foreign competitors. We also analyze the factors that increase the likelihood of such strategic behavior. This strategic interaction is formulated as a Stackelberg market entry game where the incumbent domestic firm chooses an R&D-based 'hinder' strategy against the foreign rival and an 'accommodation' strategy. Our findings indicate that under endogenous pricing, the domestic firm may strategically invest in R&D to raise entry costs for foreign rivals, potentially eliminating their expected profits from entering the market. Intermediate market size plays a crucial role in this determination. Specifically, we identify a range of intermediate market sizes where the incumbent firm can successfully deter entry by the foreign rival through strategic R&D investment, thereby preserving its monopoly position even after trade liberalization. Consequently, under these circumstances, trade liberalization may paradoxically lead to a reduction in overall welfare. These findings underscore the importance of considering market size in the design of competition and trade policies.
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