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The Strategic Role of Information Asymmetry on Demand for the Multinational Enterprise

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  • Rafael, MONER-COLONQUES

    (Universidad de Valencia, Spain)

  • Vicente, ORTS

    (Universitat Jaume I, Castellon - Spain)

  • José J., SEMPERE-MONERRIS

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract

We study how asymmetric information impinge on oligopolistic firms’ decision between direct investment and exports in a game-theoretic model with Bayesian learning. Host firms have superior information about market demand and foreign firms can improve their knowledge if foreign direct investment (FDI) is undertaken. In addition to the well-known tension between the fixed set-up costs of investment, the additional variable costs of exports and oligopoly sizes, the incentive to invest abroad is explained by the strategic learning effect. FDI may be observed even if foreign firms are pessimistic or trade costs are zero. Interestingly, compared with the certainty equivalent, the equilibrium number of investors is larger when foreign firms hold optimistic beliefs or, if these are pessimistic, when the strategic learning effect outweighs the conjecture effect.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2003002.

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Length: 37
Date of creation: 01 Feb 2003
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Handle: RePEc:ctl:louvir:2003002

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Keywords: Asymmetric information; Bayesian learning; FDI; international oligopoly;

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  1. Ignatius J. Horstmann & James R. Markusen, 1995. "Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise," NBER Working Papers 5029, National Bureau of Economic Research, Inc.
  2. Blomstrom, Magnus & Kokko, Ari, 1998. " Multinational Corporations and Spillovers," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 12(3), pages 247-77, July.
  3. James R. Markusen & Anthony J. Venables, 1995. "Multinational Firms and The New Trade Theory," NBER Working Papers 5036, National Bureau of Economic Research, Inc.
  4. Motta, Massimo, 1992. "Multinational firms and the tariff-jumping argument : A game theoretic analysis with some unconventional conclusions," European Economic Review, Elsevier, Elsevier, vol. 36(8), pages 1557-1571, December.
  5. Ethier, W.J. & Markusen, J.R., 1993. "Multinational Firms, Technology Diffusion and Trade," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0303, Institute of Social and Economic Research, Osaka University.
  6. Rafael Rob & Nikolaos Vettas, 2001. "Foreign Direct Investment and Exports with Growing Demand," Penn CARESS Working Papers, Penn Economics Department f8c083d9257897f97ff49d054, Penn Economics Department.
  7. Motta, Massimo, 1994. "International trade and investments in a vertically differentiated industry," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 12(2), pages 179-196, June.
  8. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 9(2), pages 169-189, Spring.
  9. Ignatius J. Horstmann & James R. Markusen, 1990. "Endogenous Market Structures in International Trade," NBER Working Papers 3283, National Bureau of Economic Research, Inc.
  10. Hoff, Karla, 1997. "Bayesian learning in an infant industry model," Journal of International Economics, Elsevier, Elsevier, vol. 43(3-4), pages 409-436, November.
  11. Jean-Pierre Ponssard, 1979. "The Strategic Role of Information on the Demand Function in an Oligopolistic Market," Management Science, INFORMS, INFORMS, vol. 25(3), pages 243-250, March.
  12. Horstmann, Ignatius J & Markusen, James R, 1987. "Strategic Investments and the Development of Multinationals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 109-21, February.
  13. Fosfuri, Andrea & Motta, Massimo, 1999. " Multinationals without Advantages," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 101(4), pages 617-30, December.
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