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Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise

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Author Info
Ignatius J. Horstmann
James R. Markusen

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Abstract

We consider the multinational firm's decision on whether to enter a new market immediately via direct investment or to contract initially with a local agent and (possibly) invest later. Use of a local agent allows the multinational to avoid costly mistakes by finding out if the market is large enough to support direct investment. However, the agent is able to extract information rents from the multinational due to being better informed about market characteristics. We find that direct investment is the desirable mode of entry when the market is on average large and there is little down- side risk in expected profits.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5029.

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Date of creation: Feb 1995
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Handle: RePEc:nbr:nberwo:5029

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F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

References listed on IDEAS
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  1. Ethier, Wilfred J, 1986. "The Multinational Firm," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 805-33, November. [Downloadable!] (restricted)
  2. Ignatius Horstmann & James R. Markusen, 1987. "Licensing versus Direct Investment: A Model of Internalization by the Multinational Enterprise," Canadian Journal of Economics, Canadian Economics Association, vol. 20(3), pages 464-81, August. [Downloadable!] (restricted)
  3. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
  4. Ethier, Wilfred J. & Markusen, James R., 1996. "Multinational firms, technology diffusion and trade," Journal of International Economics, Elsevier, vol. 41(1-2), pages 1-28, August. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Rafael Rob & Nikolaos Vettas, 2001. "Foreign Direct Investment and Exports with Growing Demand," Penn CARESS Working Papers f8c083d9257897f97ff49d054, Penn Economics Department. [Downloadable!]
  2. Rafael Rob & Nikolaos Vettas, 2003. "Foreign Direct Investment and Exports with Growing Demand," PIER Working Paper Archive 03-001, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
  3. Iwai, Nobuyuki & Thompson, Stanley R. & Banerjee, Priyodorshi, 2004. "Foreign Direct Investment and Education Investment in Developing Countries," Working Papers 15643, University of Florida, International Agricultural Trade and Policy Center. [Downloadable!]
  4. Mikhail Klimenko & Kamal Saggi, 2004. "Technical Compatibility and the Mode of Foreign Entry under Network Externalities," Working Papers 04-05, NET Institute, revised Oct 2004. [Downloadable!]
  5. Choi, Jay Pil, 1996. "Technology Transfer with Moral Hazard," Economics Series 22, Institute for Advanced Studies. [Downloadable!]
    Other versions:
  6. James E. Anderson, 1999. "Why Do Nations Trade (So Little)?," Boston College Working Papers in Economics 428, Boston College Department of Economics. [Downloadable!]
  7. Rafael, MONER-COLONQUES & Vicente, ORTS & JosŽ J., SEMPERE-MONERRIS, 2003. "The Strategic Role of Information Asymmetry on Demand for the Multinational Enterprise," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2003002, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
  8. Nigel Driffield & Karl Taylor, . "Are Foreign Firms More Technologically Intensive? UK Establishment Evidence From the ARD," Discussion Papers in Public Sector Economics 01/9, Department of Economics, University of Leicester. [Downloadable!]
    Other versions:
  9. Kotseva, Rossitsa & Vettas, Nikolaos, 2005. "Foreign Direct Investment and Exports Dynamics with Demand Learning," CEPR Discussion Papers 5262, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. James E. Rauch & Joel Watson, 1999. "Starting Small in an Unfamiliar Environment," NBER Working Papers 7053, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Valeria Gattai & Corrado Molteni, 2007. "Dissipation of Knowledge and the Boundaries of the Multinational Enterprise," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(1), pages 1-26, April. [Downloadable!] (restricted)
    Other versions:
  12. Andrea Fosfuri & Massimo Motta & Thomas Ronde, 1998. "Foreign Direct Investments and Spillovers through Workers' Mobility," Economics Working Papers 258, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  13. Wendt, Minh & Pederson, Glenn, 2006. "Foreign Direct Investment in the Food Manufacturing Industry," Working Papers 14319, University of Minnesota, The Food Industry Center. [Downloadable!]
  14. Barbara G. Katz & Joel Owen, 2003. "Should Governments Compete for Foreign Direct Investment?," Working Papers 03-07, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
    Other versions:
  15. Lorenzo Casaburi & Valeria Gattai, 2009. "Why FDI? An Empirical Assessment Based on Contractual Incompleteness and Dissipation of Intangible Assets," Working Papers 164, University of Milano-Bicocca, Department of Economics, revised Jul 2009. [Downloadable!]
  16. Mihir A. Desai & James R. Hines, Jr., 1996. ""Basket" Cases: International Joint Ventures After the Tax Reform Act of 1986," NBER Working Papers 5755, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Valeria Gattai, 2006. "From the Theory of the Firm to FDI and Internalisation: A Survey," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 65(2), pages 225-262, November. [Downloadable!]
    Other versions:
  18. Rob, Rafael & Vettas, Nikolaos, 2001. "Foreign Direct Investment and Exports with Growing Demand," CEPR Discussion Papers 2786, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  19. Hamid Beladi & Sugata Marjit & Avik Chakrabarti, . "Tariff Jumping and Joint Ventures," Working Papers 0002, College of Business, University of Texas at San Antonio. [Downloadable!]
    Other versions:
  20. J Rauch & Joel Watson, 1999. "Starting Small in an Unfamiliar Environment," University of California at San Diego, Economics Working Paper Series 1996-28R, Department of Economics, UC San Diego. [Downloadable!]
  21. Amy Glass & Kamal Saggi, 1999. "The Dynamic Impact of Internalization Advantage," Working Papers 99-04, Ohio State University, Department of Economics. [Downloadable!]
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