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Entering a foreign market: Exports, FDI or strategic alliance?

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  • Morasch, Karl

Abstract

The decision over exports vs. foreign direct investment (FDI) is usually discussed in an extension of the so-called Melitz model where firms with heterogeneous costs compete in a monopolistically competitive industry. The present paper starts from a situation where a potential foreign entrant would be just indifferent between exports and FDI in such a setting. However, by assuming oligopolistic interaction, strategic considerations are also taken into account. It is shown how the strategic impact of lower marginal cost makes FDI more attractive in a Cournot setting while exports are preferable under price competition in a market with differentiated goods. Beyond that it is also explored how a strategic alliance with a local incumbent could be a superior alternative for market entry.

Suggested Citation

  • Morasch, Karl, 2018. "Entering a foreign market: Exports, FDI or strategic alliance?," Working Papers in Economics 2018,5, Bundeswehr University Munich, Economic Research Group.
    • Handle: RePEc:zbw:ubwwpe:20185
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Entry strategies; Trade; FDI; Alliances; Oligopoly;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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