Smith (1987) analyses the effect on FDI of trade policy adjustments within a gametheoretical
approach. MNCs act in a strategic way in concentrated markets, and may decide
to invest rather than export into a country in order to avoid entry of domestic firms, in the
presence of sunk costs. In his model, the impact of a reduction in tariffs is not clear a
priori, and depending on the initial equilibrium, it may also increase FDI, thereby reversing
the 'tariff-jumping' argument7.