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Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise

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  • Ignatius J. Horstmann
  • James R. Markusen

Abstract

We consider the multinational firm's decision on whether to enter a new market immediately via direct investment or to contract initially with a local agent and (possibly) invest later. Use of a local agent allows the multinational to avoid costly mistakes by finding out if the market is large enough to support direct investment. However, the agent is able to extract information rents from the multinational due to being better informed about market characteristics. We find that direct investment is the desirable mode of entry when the market is on average large and there is little down- side risk in expected profits.

Suggested Citation

  • Ignatius J. Horstmann & James R. Markusen, 1995. "Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise," NBER Working Papers 5029, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5029
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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.
    2. Ignatius Horstmann & James R. Markusen, 1987. "Licensing versus Direct Investment: A Model of Internalization by the Multinational Enterprise," Canadian Journal of Economics, Canadian Economics Association, vol. 20(3), pages 464-481, August.
    3. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
    4. Wilfred J. Ethier, 1986. "The Multinational Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 805-833.
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    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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