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Learning to sell in new markets: A preliminary analysis of market entry by a multinational firm
Author(s) -
Horstmann Ignatius J.,
Markusen James R.
Publication year - 2018
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/roie.12369
Subject(s) - multinational corporation , economic rent , investment (military) , industrial organization , business , microeconomics , economics , investment decisions , finance , production (economics) , politics , political science , law
We consider the multinational firm's decision on whether to enter a new market immediately via direct investment or to contract initially with a local agent and (possibly) invest later. Use of a local agent allows the multinational to avoid costly mistakes by finding out if the market is large enough to support direct investment. However, the agent is able to extract information rents from the multinational due to being better informed about market characteristics. We derive the optimal sequence of agent contracts and discuss situations in which the multinational contracts initially with a local agent and then converts subsequently to an owned sales operation.