The role of location choice in strategic export promotion policy: capital liberalization incentives of exporting countries

We study an international capital liberalization game where exporting countries choose either to open the domestic market for capital inflow or not. We clarify that if the cost difference is large enough, the less productive country is indifferent between closing or opening for inward direct investment, and the more productive country never has an incentive to open. International coordination to open markets is not always necessary in our capital liberalization game since it may deteriorate the welfare of the more productive country and will make world welfare worse off.