The oligopoly reaction hypothesis

In an oligopoly environment, FDI by one firm triggers similar investments by other leading firms in the industry in an attempt to maintain their market shares.An implication of the oligopoly reaction hypothesis is that the process of FDI is self-limiting, since the invasion of each other’s home market leads to an increase in competition and a decline in the intensity of oligopoly reaction.This implication, however, is incompatible with stylized facts.While direct investment has led to increased competition in many industries, this increase has not resulted in a corresponding reduction in FDI.