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Exporting versus foreign direct investment: Learning through propinquity

Listed author(s):
  • CREANE, Anthony
  • MIYAGIWA, Kaz

This paper considers the strategic role learning plays on foreign direct investments (FDI) under demand and cost uncertainty. FDI allows a foreign firm to respond more effectively to changing local demand than if it exports. With cost uncertainty, however, FDI has a second effect. Since a foreign firm procures inputs locally as does its home country rival, the problem of learning is transformed from about its private parameter to about the common parameter, which proves harmful in both price and quantity competition. We show that FDI decisions depend on whether the firm faces relatively more demand or cost uncertainty, how differentiated the rival's product is, and to what extent inputs are locally procured.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/27209/1/070_hiasDP15-01.pdf
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Paper provided by Hitotsubashi Institute for Advanced Study, Hitotsubashi University in its series Discussion paper series with number 2015-01.

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Length: 33 p.
Date of creation: 06 May 2015
Handle: RePEc:hit:hiasdp:2015-01
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  1. Edward E Schlee, 2004. "Expected Consumer's Surplus as an Approximate Welfare Measure," Econometric Society 2004 North American Summer Meetings 97, Econometric Society.
  2. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
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  12. Sung, Hongmo & Lapan, Harvey E, 2000. "Strategic Foreign Direct Investment and Exchange-Rate Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(2), pages 411-423, May.
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  15. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 185-199.
  16. Anthony Creane & Kaz Miyagiwa, 2007. "Export, Foreign Direct Investment, and Joint Ventures: Learning the Rival's Costs through Propinquity," ISER Discussion Paper 0691, Institute of Social and Economic Research, Osaka University.
  17. 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.
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  21. Creane, Anthony, 2007. "Productivity information in vertical sharing agreements," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 821-841, August.
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