Product Differentiation and the Location of International Production
We analyze how product differentiation influences firms' choice between exporting and foreign direct investment. When product specifications are determined endogenously, we show that there is no symmetric solution to the product specification subgame. The cost disadvantage of an exporting firm translates into a disadvantage in product specification. Overseas production is favored if this allows the investing firm to adopt a more aggressive product specification. Our analysis suggests an ambiguous relationship among location, product differentiation, and cost and demand functions, confirmed by the existence of a parameter range for which there is no pure strategy equilibrium in location choice. Copyright 2004 Blackwell Publishing, 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK..
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