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A Strategy for the Foreign Market Penetration under Complete Information

Author

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  • Seon Jae Kim

    (Paichai University)

  • Young Han Kim

    (Samsung Economic Research Institute)

Abstract

This study examines the optimal foreign market penetration strategy of a domestic firm when the firm engages in Bertrand competition with an incumbent firm in a foreign market. The study demonstrates that under complete information about the product quality of the entrant firm, the entrant firm prefers to choose a less expensive entry mode when the foreign consumers' marginal rate of substitution between quality and price is high. A high import tariff of the foreign government induces the entrant firm to prefer FDI to exporting if the MRS is high and FDI has a tariff-jumping effect. If the incumbent firm is a local firm, the entrant firm is more reserved in choosing FDI. When the incumbent firm is a local firm, an import tare improves foreign social welfare only when MRS is low. When MRS is high, the import tariff deteriorates social welfare of the foreign country.

Suggested Citation

  • Seon Jae Kim & Young Han Kim, 1996. "A Strategy for the Foreign Market Penetration under Complete Information," Korean Economic Review, Korean Economic Association, vol. 12(2), pages 47-69.
  • Handle: RePEc:kea:keappr:ker-199612-12-2-03
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