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FDI as a Signal of Quality

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  • Seiichi Katayama
  • Kaz Miyagiwa

Abstract

This paper considers a new-product firm's choice between exporting and foreign direct investment (FDI) to access foreign markets. We find that, when quality is unknown to buyers, the firm may choose FDI over exporting to signal quality, even though FDI is a costlier mode of access than exporting. We then use the model to study the effect of local labor requirement policy imposed by the host country government.

Suggested Citation

  • Seiichi Katayama & Kaz Miyagiwa, 2007. "FDI as a Signal of Quality," Emory Economics 0706, Department of Economics, Emory University (Atlanta).
  • Handle: RePEc:emo:wp2003:0706
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    References listed on IDEAS

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    1. Bagwell, Kyle, 1991. "Optimal Export Policy for a New-Product Monopoly," American Economic Review, American Economic Association, vol. 81(5), pages 1156-1169, December.
    2. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    3. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    4. Wolfgang Mayer, 1984. "The Infant-Export Industry Argument," Canadian Journal of Economics, Canadian Economics Association, vol. 17(2), pages 249-269, May.
    5. Bagwell, Kyle, 2007. "The Economic Analysis of Advertising," Handbook of Industrial Organization, Elsevier.
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    Cited by:

    1. Anthony Creane & Kaz Miyagiwa, 2010. "Exporting Versus Foreign Direct Investment: Learning through Propinquity," Emory Economics 1010, Department of Economics, Emory University (Atlanta).
    2. Koska, Onur A. & Long, Ngo Van & Staehler, Frank, 2015. "Foreign Direct Investment as a Signal," MPRA Paper 68025, University Library of Munich, Germany.

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