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The International Strategy of Firms: the Role of Endogenous Product Differentiation

  • Pierre Blanchard
  • Carl Gaigné
  • Claude Mathieu

We study the impact of trade liberalization on the international strategy of firms (to export and/or invest abroad as well as the number of products to be produced and exported) when product differentiation is endogenous. By considering product differentiation as a strategic variable, our analysis sheds new light on the impact of trade barriers on the decision to produce abroad and on the choice of product range, in accordance with recent empirical evidence. Indeed, we show that, even though technology exhibits the same productivity for each variety, firms drop some varieties with trade integration. In addition, our results reveal that, contrary to the standard theoretical literature, the relationship between the decision to export and trade costs is non-linear. When trade costs are relatively high, each firm export and is multi-product. Then, when trade costs take intermediate values, firms may invest abroad and the choice of producing abroad results from a prisoner's dilemma game. Finally, when trade costs are low, firms export but become single-product.

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Paper provided by INRA UMR SMART in its series Working Papers SMART - LERECO with number 10-02.

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Date of creation: 2010
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Handle: RePEc:rae:wpaper:201002
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  1. Thierry Mayer & Marc J. Melitz & Gianmarco I.P. Ottaviano, 2011. "Market Size, Competition, and the Product Mix of Exporters," Development Working Papers 316, Centro Studi Luca d'Agliano, University of Milano.
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  10. Antoine Berthou & Lionel Fontagné, 2013. "How do Multiproduct Exporters React to a Change in Trade Costs?," PSE - Labex "OSE-Ouvrir la Science Economique" hal-00975562, HAL.
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  12. K Ojah & L Monplaisir, 2003. "Investors' valuation of global product design and development," Journal of International Business Studies, Palgrave Macmillan, vol. 34(5), pages 457-472, September.
  13. Timothy Dunne & J. Bradford Jensen & Mark J. Roberts, 2009. "Producer Dynamics: New Evidence from Micro Data," NBER Books, National Bureau of Economic Research, Inc, number dunn05-1, September.
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  17. repec:adr:anecst:y:1997:i:47:p:10 is not listed on IDEAS
  18. Gianni De Fraja & George Norman, 2004. "Product Differentiation and the Location of International Production," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(1), pages 151-170, 03.
  19. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
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