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The Strategic Role of Information Asymmetry on Demand for the Multinational Enterprise

Author

Listed:
  • Rafael, MONER-COLONQUES

    (Universidad de Valencia, Spain)

  • Vicente, ORTS

    (Universitat Jaume I, Castellon - Spain)

  • José J., SEMPERE-MONERRIS

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract

We study how asymmetric information impinge on oligopolistic firms’ decision between direct investment and exports in a game-theoretic model with Bayesian learning. Host firms have superior information about market demand and foreign firms can improve their knowledge if foreign direct investment (FDI) is undertaken. In addition to the well-known tension between the fixed set-up costs of investment, the additional variable costs of exports and oligopoly sizes, the incentive to invest abroad is explained by the strategic learning effect. FDI may be observed even if foreign firms are pessimistic or trade costs are zero. Interestingly, compared with the certainty equivalent, the equilibrium number of investors is larger when foreign firms hold optimistic beliefs or, if these are pessimistic, when the strategic learning effect outweighs the conjecture effect.

Suggested Citation

  • Rafael, MONER-COLONQUES & Vicente, ORTS & José J., SEMPERE-MONERRIS, 2003. "The Strategic Role of Information Asymmetry on Demand for the Multinational Enterprise," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2003002, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvir:2003002
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    File URL: http://sites.uclouvain.be/econ/DP/IRES/2003-2.pdf
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    References listed on IDEAS

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    1. Ethier, Wilfred J. & Markusen, James R., 1996. "Multinational firms, technology diffusion and trade," Journal of International Economics, Elsevier, vol. 41(1-2), pages 1-28, August.
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    5. Horstmann, Ignatius J & Markusen, James R, 1996. "Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(1), pages 1-19, February.
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    More about this item

    Keywords

    Asymmetric information; Bayesian learning; FDI; international oligopoly;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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