Entering a Foreign Market: Exports, FDI or Strategic Alliance?

Abstract

The decision over exports vs. foreign direct investment (FDI) is usually discussed in an extension of the so-called Melitz model where rms with heterogeneous costs compete in a monopolistically competitive industry. The present paper starts from a situation where a potential foreign entrant would be just indierent between exports and FDI in such a setting. However, by assuming oligopolistic interaction, strategic considerations are also taken into account. It is shown how the strategic impact of lower marginal cost makes FDI more attractive in a Cournot setting while exports are preferable under price competition in a market with dierentiated goods. Beyond that it is also explored how a strategic alliance with a local incumbent could be a superior alternative for market entry.

Global Firms

“…This property of the model is consistent with the literature on pricing to market, where firms charge different prices for the same good across markets, including Krugman (1987), Bergin and Feenstra (2001), Atkeson and Burstein (2008), Goldberg and Hellerstein (2013), and Fitzgerald and Haller (2014), as reviewed in De Loecker and Goldberg (2014). Finally, the variable markup in equations (21) and (22) implies that an increase in marginal costs is not fully passed on to consumers in the form of a higher price, because the fall in market share induced by a higher price leads to a fall in markup. A large body of empirical research confirms such incomplete pass-through, as reviewed in Goldberg and Knetter (1997), with implications for monetary policy and the international transmission of shocks, as examined in Smets and Wouters (2007); Gopinath and Itskhoki (2010) ;Berman, Martin, and Mayer (2012); and Amiti, Itskhoki, and Konings (2014).…”

“…Using the markup (21) and our assumption of constant marginal costs to recover variable costs from sales (as E mik K / μ mif F ), and using the share of each source country in variable costs (15), imports of intermediate inputs for product k by firm f from production location i within sector g from source country j are:…”

“…For each flow of goods across a US border, this data set records the product classification(s) of the shipment ( ten-digit harmonized system (HS)), the value and quantity shipped, the date of the shipment, the destination or source country, the transport mode used to ship the goods, the identity of the US firm engaging in the trade, and whether the trade is with a related party or occurs at arm's length. 21 In our main results, we aggregate the establishment-level data from the CM and LBD and the trade transactions data up to the level of the firm. We thus obtain a data set for each firm that contains information on firm characteristics (e.g., industry, employment, productivity, and total shipments) as well as on each of the margins of firm international participation considered above (exports of each product, the number of products exported to each market, the num- 19 For further discussion of the CM see, for example, Bernard, Redding, and Schott (2010).…”

“…20 See Jarmin and Miranda (2002) for further details on the LBD. 21 ber of export markets, imports of each input, the number of imported inputs from each source country, and the number of source countries). We also report some additional results in which we use the information on exports and imports by firm, product, destination, and year in the trade transactions data.…”