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Export, Foreign Direct Investment, and Joint Ventures: Learning the Rival's Costs through Propinquity

  • Anthony Creane
  • Kaz Miyagiwa

We examine the role of cost uncertainty in a firm's choice between exporting and foreign investment in oligopolistic industry. We consider both foreign direct investment and an international joint venture, and allow country-specific and firm-specific cost uncertainty. Unlike exporting, either form of foreign investment exposes home and foreign firms to common country-specific cost shocks, implying a better knowledge of each other's country-specific shocks. Further, a joint venture allows the firms to learn each other's firm-specific cost. A firm's plant location decision depends on the interaction of these two effects, which depend on the type of competition and the substitutability of the firm's products.

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Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0691.

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Date of creation: Jun 2007
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Handle: RePEc:dpr:wpaper:0691
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  1. Goldberg, Linda S & Kolstad, Charles D, 1995. "Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 855-73, November.
  2. Jonathan Eaton & Gene M. Grossman, 1986. "Optimal Trade and Industrial Policy Under Oligopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 383-406.
  3. Wilfred J. Ethier, 1986. "The Multinational Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 805-833.
  4. Anthony Creane & Kaz Miyagiwa, 2005. "Information and Disclosure in Strategic Trade Policy," Emory Economics 0530, Department of Economics, Emory University (Atlanta).
  5. Viaene, Jean-Marie & Zilcha, Itzhak, 1998. "The Behavior of Competitive Exporting Firms under Multiple Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 591-609, August.
  6. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
  7. Ignatius J. Horstmann & James R. Markusen, 1990. "Endogenous Market Structures in International Trade," NBER Working Papers 3283, National Bureau of Economic Research, Inc.
  8. Anthony Creane & Kaz Miyagiwa, 2007. "Foreign Direct Investment and Cost Uncertainty: Correlation and Learning Effects," Emory Economics 0711, Department of Economics, Emory University (Atlanta).
  9. Esther Gal-or, 1986. "Information Transmission—Cournot and Bertrand Equilibria," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 85-92.
  10. Xavier Vives, 1990. "Trade Association Disclosure Rules, Incentives to Share Information, and Welfare," RAND Journal of Economics, The RAND Corporation, vol. 21(3), pages 409-430, Autumn.
  11. Sung, Hongmo & Lapan, Harvey E., 2000. "Strategic Foreign Direct Investment and Exchange Rate Uncertainty," Staff General Research Papers Archive 1335, Iowa State University, Department of Economics.
  12. Horn, Henrik & Persson, Lars, 1999. "The Equilibrium Ownership of an International Oligopoly," CEPR Discussion Papers 2302, C.E.P.R. Discussion Papers.
  13. Morasch, Karl, 2000. "Strategic alliances: a substitute for strategic trade policy?," Journal of International Economics, Elsevier, vol. 52(1), pages 37-67, October.
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