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Foreign Production, Strategic Choice and the Domestic Market Effect

Published on Oct 1, 2000
Abstract
This paper presents a simple model of the interaction between two firms, based in different countries, each of which faces the export v MNE choice concerning the serving of each other’s home market. The basic game structure is similar to that elsewhere in the literature (Horstmann & Markusen (1992), and Rowthorn (1992)). To this, I add a further choice: investment in a new technology that allows a corporate-wide reduction in variable costs (i.e. cost reducing R&D). In the presence of such corporate-wide investment, the firms’ decisions concerning each other’s home markets are interdependent. Furthermore, strategic motives for foreign direct investment (FDI) relate not only to a firm’s foreign market profits, but also to those from their domestic market. This is because one firm’s export v MNE choice can influence both its rival’s choice and investment behaviour. One possibility is that a firm sets up a plant overseas in order to influence the behaviour of its rival, even though its profits from serving the foreign market would be higher by exporting.
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References3
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#1Maria Luisa Petit (Sapienza University of Rome)H-Index: 8
#2Francesca Sanna-Randaccio (Sapienza University of Rome)H-Index: 10
The paper examines how investment in research influences the form of foreign expansion chosen by the firm, and vice versa. We consider a two-country model where a monopolist producing in one country can choose between export and foreign direct investment. We assume process innovation, where the cost-reducing technological innovations are an outcome of the firm's investment in R&D. The role of technology transfer costs is explored. The model shows that, with low costs of technology transfer, ther...
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This paper examines the factors which influence intra-industry trade under oligopoly. It argues that major determinants are the size of markets and the height of trade barriers. If national markets are large and trade barriers high, intra-industry trade is replaced by cross-investment between countries, whereby firms serve the markets of their foreign rivals by investing abroad instead of exporting. This result is established formally using a simple two country, two firm game-theoretic model. Th...
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#1Ignatius J. Horstmann (UWO: University of Western Ontario)H-Index: 20
#2James R. Markusen (NBER: National Bureau of Economic Research)H-Index: 51
Abstract Almost all of the large literature on international trade with imperfect competition assumes exogenous market structures. The purpose of this paper is to develop a simple model that generates alternative market structures as Nash equilibria for different parameterizations of the basic model. Equilibrium market structure is a function of the underlying technology. Familiar configurations such as a duopoly competing in exports or a single multinational producing in both markets arise as s...
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