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Revisiting Oligopolistic Reaction: Are Decisions on Foreign Direct Investment Strategic Complements?
Author(s) -
Head Keith,
Mayer Thierry,
Ries John
Publication year - 2002
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.2002.00453.x
Subject(s) - oligopoly , risk aversion (psychology) , strategic complements , foreign direct investment , economics , microeconomics , investment (military) , financial economics , expected utility hypothesis , cournot competition , macroeconomics , political science , politics , law
Knickerbocker (1973) introduced the notion of oligopolistic reaction to explain why firms follow rivals into foreign markets. We develop a model that incorporates central features of Knickerbocker's story—oligopoly, uncertainty, and risk aversion—to establish the conditions required to generate follow‐the‐leader behavior. We find that rival foreign investment will make risk‐neutral firms less inclined to move abroad once its rivals have done so. We show that Knickerbocker's prediction relies on risk aversion and derive an expression for the minimum amount of risk aversion needed to generate oligopolistic reaction.