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Trade costs and international strategy of firms: the role of endogenous product differentiation

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Author Info

  • Pierre Blanchard

    (ERUDITE, quipe de Recherche sur l'Utilisation des Données Individuelles et Temporelles sur l'Economie, Université Paris-Est Créteil)

  • Carl Gaigné

    ()
    (Structures et Marchés Agricoles, Ressources et Territoires, INRA
    Centre de recherche CREATE, Université de Laval)

  • Claude Mathieu

    (ERUDITE, Equipe de Recherche sur l'Utilisation des Données Individuelles et Temporelles sur l'Economie, Université Paris-Est Créteil)

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    Abstract

    We study the impact of trade liberalization on the international strategy of firms (to export and/or invest abroad as well as the number of products to be produced) when product differentiation is endogenous. By considering product differentiation as a strategic variable, our analysis sheds new light on the impact of trade barriers on the decision to produce abroad and on the choice of product range, in accordance with recent empirical evidence. Indeed, we show, even though technology exhibits the same productivity for each variety, firms drop some of varieties with trade integration. In addition, our results reveal that, contrary to the standard theoretical literature, the relationship between the decision to export and trade costs is non-linear. When trade costs are relatively high, each firm export and is multi-product. Then, when trade costs take intermediate values, firms may invest abroad and the choice of producing abroad results from a prisoner's dilemma game. Finally, when trade costs are low, firms export, but become single-product.

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    Bibliographic Info

    Paper provided by Institut National de la Recherche Agronomique, France in its series Working Papers with number 171833.

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    Length: 1023-1036
    Date of creation: 2012
    Date of revision:
    Publication status: Published in Regional Science and Urban Economics
    Handle: RePEc:inr:wpaper:171833

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    Related research

    Keywords: Foreign direct investment; exports; multi-product competition; endogenuos differentiation product; trade integration; investissement étranger directexportation;

    References

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    1. Karolina Ekholm,, . "Factor Endowments and the Pattern of Affiliate Production by Multinational Enterprises," Discussion Papers 97/19, University of Nottingham, CREDIT.
    2. Klemperer, Paul, 1992. "Equilibrium Product Lines: Competing Head-to-Head May Be Less Competitive," American Economic Review, American Economic Association, American Economic Association, vol. 82(4), pages 740-55, September.
    3. James Brander & Jonathan Eaton, 1982. "Product Line Rivalry," Working Papers, Queen's University, Department of Economics 519, Queen's University, Department of Economics.
    4. Gianni De Fraja & George Norman, 2004. "Product Differentiation and the Location of International Production," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 13(1), pages 151-170, 03.
    5. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, Econometric Society, vol. 47(5), pages 1145-50, September.
    6. Pierre Blanchard & Carl Gaigné & Claude Mathieu, 2010. "The International Strategy of Firms: the Role of Endogenous Product Differentiation," Working Papers SMART - LERECO, INRA UMR SMART 10-02, INRA UMR SMART.
    7. Martinez-Giralt, Xavier & Neven, Damien J, 1988. "Can Price Competition Dominate Market Segmentation?," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 36(4), pages 431-42, June.
    8. Richard E. Baldwin & Gianmarco I. P. Ottaviano, 1998. "Multiproduct Multinationals and Reciprocal FDI Dumping," NBER Working Papers 6483, National Bureau of Economic Research, Inc.
    9. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
    10. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, American Economic Association, vol. 87(4), pages 520-44, September.
    11. Kristian Behrens & Pierre M. Picard, 2008. "Bidding for Horizontal Multinationals," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(6), pages 1244-1278, December.
    12. Ben-Akiva, Moshe & de Palma, Andre & Thisse, Jacques-Francois, 1989. "Spatial competition with differentiated products," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 19(1), pages 5-19, February.
    13. Alan Rugman, 1987. "Multinationals and trade in services: A transaction cost approach," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 123(4), pages 651-667, December.
    14. Brander, James & Krugman, Paul, 1983. "A 'reciprocal dumping' model of international trade," Journal of International Economics, Elsevier, Elsevier, vol. 15(3-4), pages 313-321, November.
    15. Claude MATHIEU, 1997. "International Enterprises and Endogenous Market Structure," Annales d'Economie et de Statistique, ENSAE, issue 47, pages 171-195.
    16. 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.
    17. Avner Shaked & John Sutton, 1990. "Multiproduct Firms and Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 45-62, Spring.
    18. K Ojah & L Monplaisir, 2003. "Investors' valuation of global product design and development," Journal of International Business Studies, Palgrave Macmillan, vol. 34(5), pages 457-472, September.
    19. Stephen Redding, 2009. "In brief: Heterogeneous firms in international trade," CentrePiece - The Magazine for Economic Performance, Centre for Economic Performance, LSE 292, Centre for Economic Performance, LSE.
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