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Capacity Choice and Preemption of a Foreign Market
Author(s) -
Vannini Stefano
Publication year - 1998
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00114
Subject(s) - preemption , multinational corporation , foreign direct investment , competition (biology) , economics , industrial organization , microeconomics , international trade , business , international economics , computer science , ecology , finance , biology , macroeconomics , operating system
This paper studies the strategic role of foreign direct investments (FDIs) when specified as a device for a multinational enterprise (MNE) to precommit capacity. This captures the idea of an MNE preempting the host market or, at least, achieving more profitable outcomes by setting the initial conditions of the post‐entry competition with local rivals. Here, the MNE chooses FDI even if “exporting costs” (e.g., tariffs) are not considered. Market preemption is an alternative justification for FDI, but not the only one; sometimes the tradeoff between advantages of strategic leadership and cost of establishing offshore facilities, alone, justifies FDI.