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Tariff Policy and the Foreign Entry Decision in the Presence of a Cost‐Based Informational Asymmetry

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  • Mark G. Herander
  • Brad Kamp

Abstract

The paper demonstrates that the standard prediction on the relation between tariff rates and the mode of foreign entry—exports or direct investment—may not hold in the presence of incomplete information. A foreign firm lacks full information on the cost structure of an informed incumbent firm located in the domestic (potential) host country. Within a two‐period model, the local incumbent may behave in a manner which keeps the potential foreign entrant uninformed of its cost structure. In such a pooling equilibrium, the uninformed foreign firm either refrains from entering altogether or serves the host country via exports at tariff rates which would, otherwise under complete information, induce entry via direct investment. When entry mode is altered, other standard full‐information effects of trade policy may also no longer hold.

Suggested Citation

  • Mark G. Herander & Brad Kamp, 2003. "Tariff Policy and the Foreign Entry Decision in the Presence of a Cost‐Based Informational Asymmetry," Review of International Economics, Wiley Blackwell, vol. 11(5), pages 845-859, November.
    • Handle: RePEc:bla:reviec:v:11:y:2003:i:5:p:845-859
    DOI: 10.1046/j.1467-9396.2003.00421.x
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    References listed on IDEAS

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    1. Edward M. Graham & Paul Krugman, 1995. "Foreign Direct Investment in the United States, 3rd Edition," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 52, July.
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    Cited by:

    1. Liu, Zhiyuan & Xu, Yue & Wang, Peijie & Akamavi, Raphaël, 2016. "A pendulum gravity model of outward FDI and export," International Business Review, Elsevier, vol. 25(6), pages 1356-1371.
    2. repec:tsa:wpaper:0006eco is not listed on IDEAS
    3. Hamid Beladi & Sugata Marjit & Avik Chakrabarti, 2009. "Tariff Jumping and Joint Ventures," Southern Economic Journal, John Wiley & Sons, vol. 75(4), pages 1256-1269, April.
    4. GEORGANTZIS, Nikolaos & moner-colonques, Rafael & ORTS, Vicente & SEMPERE-MONERRIS, José J., 2012. "Theoretical and experimental insights on firms’ internationalization decisions under uncertainty," LIDAM Discussion Papers CORE 2012041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Hamid Beladi & Sugata Marjit & Avik Chakrabarti, 2006. "Tariff Jumping and Joint Ventures," Working Papers 0002, College of Business, University of Texas at San Antonio.

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