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Learning to sell in new markets: A preliminary analysis of market entry by a multinational firm

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  • Ignatius J. Horstmann
  • James R. Markusen

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 derive the optimal sequence of agent contracts and discuss situations in which the multinational contracts initially with a local agent and then converts subsequently to an owned sales operation.

Suggested Citation

  • Ignatius J. Horstmann & James R. Markusen, 2018. "Learning to sell in new markets: A preliminary analysis of market entry by a multinational firm," Review of International Economics, Wiley Blackwell, vol. 26(5), pages 1040-1052, November.
    • Handle: RePEc:bla:reviec:v:26:y:2018:i:5:p:1040-1052
    DOI: 10.1111/roie.12369
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    References listed on IDEAS

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    1. Cheng, Chen, 2011. "Information, incentives and multinational firms," Journal of International Economics, Elsevier, vol. 85(1), pages 147-158, September.
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    Cited by:

    1. Chen, Chia-Hui & Ishida, Junichiro & Mukherjee, Arijit, 2023. "Pioneer, early follower or late entrant: Entry dynamics with learning and market competition," European Economic Review, Elsevier, vol. 152(C).
    2. Chia-Hui Chen & Junichiro Ishida & Arijit Mukherjee, 2018. "An Entry Game with Learning and Market Competition," ISER Discussion Paper 1043, Institute of Social and Economic Research, The University of Osaka.
    3. Hua, Xiameng & Watson, Joel, 2022. "Starting small in project choice: A discrete-time setting with a continuum of types," Journal of Economic Theory, Elsevier, vol. 204(C).

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