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Theoretical and experimental insights on firms’ internationalization decisions under uncertainty

  • GEORGANTZIS, Nikolaos

    ()

    (LEE, Universitat Jaume I, Spain & GLOBE and Economics Dept., Universidad de Granada, Spain)

  • moner-colonques, Rafael

    (Dept. of Economics Analysis and ERI-CES, University of Valencia, Spain)

  • ORTS, Vicente

    (Economics Dept. and Instituto de Economia International, Universitat Jaume I, Spain)

  • SEMPERE-MONERRIS, José J.

    (Dept. of Economic Analysis and ERI-CES, University of Valencia, Spain; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)

We revisit and extend previous theoretical work on internationalization decisions by firms which are imperfectly informed on the state of the demand in the market into which they are planning to export or enter through foreign direct investment (FDI). The latter is a costly strategy mitigating the international firm's demand uncertainty, while the local firm is perfectly informed. We report results from an experimental test of the aforementioned framework which confirm dominant strategy play by local firms under both the good and bad states of the local demand. Also, the prediction that the magnitude of the FDI-specific cost determines whether foreign firms enter via FDI is confirmed in qualitative terms. However, in the case in which FDI is the dominant strategy under risk neutrality, less than full FDI adoption is obtained. We also find an unexpected interaction between the internationalization decision and the market strategy once entry has occurred, indicating the presence of relevant behavioral and strategic factors which are not anticipated by the theoretical model.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2012041.

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Date of creation: 22 Nov 2012
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Handle: RePEc:cor:louvco:2012041
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  1. Engelmann, Dirk & Normann, Hans-Theo, 2007. "An experimental test of strategic trade policy," Journal of Economic Behavior & Organization, Elsevier, vol. 64(1), pages 144-156, September.
  2. Comino, Stefano, 2006. "Entry and exit with information externalities," Journal of Economic Behavior & Organization, Elsevier, vol. 60(1), pages 85-99, May.
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  4. Neary, J. Peter, 2009. "Trade costs and foreign direct investment," International Review of Economics & Finance, Elsevier, vol. 18(2), pages 207-218, March.
  5. Oechssler, Jorg & Schipper, Burkhard, 2003. "Can you guess the game you are playing?," Games and Economic Behavior, Elsevier, vol. 43(1), pages 137-152, April.
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  9. Rafael Moner-Colonques & Vicente Orts & José J. Sempere-Monerris, 2007. "Asymmetric Demand Information and Foreign Direct Investment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(1), pages 93-106, 03.
  10. Sabater-Grande, Gerardo & Georgantzis, Nikolaos, 2002. "Accounting for risk aversion in repeated prisoners' dilemma games: an experimental test," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 37-50, May.
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  17. Baron, David P, 1971. "Demand Uncertainty in Imperfect Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 12(2), pages 196-208, June.
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