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Asymmetric Demand Information and Foreign Direct Investment*
Author(s) -
MonerColonques Rafael,
Orts Vicente,
SempereMonerris José J.
Publication year - 2007
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/j.1467-9442.2007.00482.x
Subject(s) - oligopoly , economics , foreign direct investment , microeconomics , competition (biology) , incentive , investment (military) , strategic complements , industrial organization , cournot competition , international economics , macroeconomics , ecology , biology , politics , political science , law
We examine the FDI versus exports decision of firms competing in an oligopolistic (quantity‐setting) market under demand uncertainty and asymmetric information. Compared to a firm that chooses to export, a firm that chooses to set up a plant in the host market has superior information about local market demand. In addition to the well‐known tension between the fixed set‐up costs of investment, the additional variable costs of exports and oligopoly sizes, the incentive to invest abroad is explained by the strategic learning effect. FDI may be observed even if trade costs are zero. The analysis is robust to price competition and to the possibility that a foreign firm can engage in both FDI and exports.