Asymmetric Demand Information and Foreign Direct Investment

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 ma...

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Bibliographic Details
Published in:The Scandinavian journal of economics 2007-03, Vol.109 (1), p.93-106
Main Authors: Moner-Colonques, Rafael, Orts, Vicente, Sempere-Monerris, José J.
Format: Article
Language:English
Subjects:
Asymmetric information
Business economics
Business investment
D82
D83
Decision making
Demand
Economic competition
Economic uncertainty
Exports
F12
F23
FDI
Financial investments
Firm theory
Foreign direct investment
Foreign direct investments
Foreign investment
Impact analysis
Incentives
Information asymmetry
International market
international oligopoly
International trade
Learning strategies
Market demand
Oligopolies
Oligopoly
Studies
Uncertainty
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Summary: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.
ISSN:0347-0520
1467-9442
1467-9442
DOI:10.1111/j.1467-9442.2007.00482.x