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Product Differentiation and the Location of International Production

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  • Gianni De Fraja
  • George Norman

Abstract

We analyze how product differentiation influences firms' choice between exporting and foreign direct investment. When product specifications are determined endogenously, we show that there is no symmetric solution to the product specification subgame. The cost disadvantage of an exporting firm translates into a disadvantage in product specification. Overseas production is favored if this allows the investing firm to adopt a more aggressive product specification. Our analysis suggests an ambiguous relationship among location, product differentiation, and cost and demand functions, confirmed by the existence of a parameter range for which there is no pure strategy equilibrium in location choice.
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  • Gianni De Fraja & George Norman, 1998. "Product Differentiation and the Location of International Production," Discussion Papers Series, Department of Economics, Tufts University 9814, Department of Economics, Tufts University.
    • Handle: RePEc:tuf:tuftec:9814
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    Cited by:

    1. Blanchard, Pierre & Gaigné, Carl & Mathieu, Claude, 2012. "Trade costs and international strategy of firms: The role of endogenous product differentiation," Regional Science and Urban Economics, Elsevier, vol. 42(6), pages 1023-1036.
    2. Emanuele Bacchiega & Antonio Minniti & Arsen Palestini, 2016. "Quality, distance and trade: A strategic approach," Papers in Regional Science, Wiley Blackwell, vol. 95, pages 165-191, March.
    3. Collie, D. & Vandenbussche, H., 1999. "Trade, FDI, and unions," Discussion Paper 1999-42, Tilburg University, Center for Economic Research.
    4. Pierre Blanchard & Carl Gaigné & Claude Mathieu, 2010. "The International Strategy of Firms: the Role of Endogenous Product Differentiation," Working Papers SMART 10-02, INRAE UMR SMART.
    5. Onur A. Koska, 2020. "Sourcing product quality for foreign market entry," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 156(3), pages 669-702, August.
    6. Alali, Walid Y. & Ellalee, Haider, 2018. "The Brexit Impact on Inward FDI in the UK," EconStor Preprints 274655, ZBW - Leibniz Information Centre for Economics.
    7. Ahmed, Usman & Hawkins, Jason & Roorda, Matthew J., 2022. "Establishment location choice model considering intra-firm interactions," Journal of Transport Geography, Elsevier, vol. 102(C).
    8. Ellalee, Haider & Alali, Walid Y., 2018. "The Brexit Impact on Inward FDI in the UK," MPRA Paper 117510, University Library of Munich, Germany, revised 20 May 2018.

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