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Export or Merge? Proximity vs. Concentration in Product Space

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  • Marc-Andreas Muendler

Abstract

This paper proposes a proximity-concentration tradeoff in product space as a determinant of horizontal foreign direct investment (FDI). Firms that enter a foreign market by exporting are able to capture consumer surplus from introducing a differentiated product with characteristics that the incumbent cannot match. In relatively globalized product space, in contrast, consumers perceive an entrant’s difference to existing products as less pronounced, so a consumer’s virtual distance costs in product space are lower and a merger with an incumbent (horizontal FDI) offers pricing power that allows the entrant to extract consumer rent. Lower physical trade costs of shipping make Bertrand price competition fiercer in differentiated product space and can provide an additional incentive for a merger. A basic product space model with a linear Hotelling setup can therefore explain why FDI has become more frequent in recent periods in the presence of falling trade costs. Cross-border merger and acquisitions data support the model’s prediction that horizontal FDI grows relatively faster than exports in differentiated goods industries, compared to homogeneous-goods industries.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4558.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4558

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Keywords: horizontal foreign direct investment; trade under imperfect competition; differentiated product space; monopolization strategies; oligopoly in imperfect markets;

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  1. Costas Arkolakis & Marc-Andreas Muendler, 2010. "The Extensive Margin of Exporting Products: A Firm-level Analysis," CESifo Working Paper Series 3309, CESifo Group Munich.
  2. Francis Bloch, 1995. "Endogenous Structures of Association in Oligopolies," RAND Journal of Economics, The RAND Corporation, vol. 26(3), pages 537-556, Autumn.
  3. Helpman, Elhanan, 1981. "International trade in the presence of product differentiation, economies of scale and monopolistic competition : A Chamberlin-Heckscher-Ohlin approach," Journal of International Economics, Elsevier, Elsevier, vol. 11(3), pages 305-340, August.
  4. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  5. Irmen, Andreas & Thisse, Jacques-François, 1996. "Competition in Multi-characteristics Spaces: Hotelling was Almost Right," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1446, C.E.P.R. Discussion Papers.
  6. Karolina Ekholm & Rikard Forslid & James R. Markusen, 2007. "Export-Platform Foreign Direct Investment," Journal of the European Economic Association, MIT Press, MIT Press, vol. 5(4), pages 776-795, 06.
  7. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  8. Carl Davidson & Ben Ferrett, 2007. "Mergers in Multidimensional Competition," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 74(296), pages 695-712, November.
  9. Dirk Hackbarth & Jianjun Maio, 2007. "The Dynamics of Mergers and Acquisitions in Oligopolistic Industries," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2007-017, Boston University - Department of Economics.
  10. Robert C. Feenstra & Robert E. Lipsey & Haiyan Deng & Alyson C. Ma & Hengyong Mo, 2005. "World Trade Flows: 1962-2000," NBER Working Papers 11040, National Bureau of Economic Research, Inc.
  11. Toxvaerd, Flavio, 2007. "Strategic Merger Waves: A Theory of Musical Chairs," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6159, C.E.P.R. Discussion Papers.
  12. Konstantinos Serfes & Hyunho Kim, 2004. "A Location Model with Preference for Variety," Econometric Society 2004 North American Summer Meetings, Econometric Society 127, Econometric Society.
  13. Federico J. Díez & Alan C. Spearot, 2012. "Core competencies, matching, and the structure of foreign direct investment: an update," Working Papers, Federal Reserve Bank of Boston 12-8, Federal Reserve Bank of Boston.
  14. Mitchell, Mark L. & Mulherin, J. Harold, 1996. "The impact of industry shocks on takeover and restructuring activity," Journal of Financial Economics, Elsevier, Elsevier, vol. 41(2), pages 193-229, June.
  15. David Hummels, 2007. "Transportation Costs and International Trade in the Second Era of Globalization," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 21(3), pages 131-154, Summer.
  16. Raith, Michael, 1996. "A General Model of Information Sharing in Oligopoly," Journal of Economic Theory, Elsevier, Elsevier, vol. 71(1), pages 260-288, October.
  17. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 15(2), pages 103-120, Spring.
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