DP2587 Foreign Production, Strategic Choice and the Domestic Market Effect
|Publication Date:||October 2000|
|Keyword(s):||Foreign Direct Investment, Multinational Enterprise, Strategic Choice|
|Programme Areas:||International Trade and Regional Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=2587|
This paper presents a simple model of the interaction between two firms, based in different countries, each of which faces the export v MNE choice concerning the serving of each other?s home market. The basic game structure is similar to that elsewhere in the literature (Horstmann & Markusen (1992), and Rowthorn (1992)). To this, I add a further choice: investment in a new technology that allows a corporate-wide reduction in variable costs (i.e. cost reducing R&D). In the presence of such corporate-wide investment, the firms? decisions concerning each other?s home markets are interdependent. Furthermore, strategic motives for foreign direct investment (FDI) relate not only to a firm?s foreign market profits, but also to those from their domestic market. This is because one firm?s export v MNE choice can influence both its rival?s choice and investment behaviour. One possibility is that a firm sets up a plant overseas in order to influence the behaviour of its rival, even though its profits from serving the foreign market would be higher by exporting.