Endogenous Market Structures in International Trade

Horstmann, Ignatius J.; Markusen, James R.

doi:10.3386/w3283

Cited by 83 publications

(92 citation statements)

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“…The key prediction of traditional models in this literature is that firms will invest abroad when the gains from avoiding trade costs outweigh the costs of maintaining capacity in multiple markets (e.g. Markusen, 1984;Horstmann and Markusen, 1992;Brainard, 1997;Markusen and Venables, 2000). Our paper shows that, when firms are uncertain about their profitability in foreign markets, they may start by testing these markets via exports -the mode characterized by lower fixed costs -before switching to FDI.…”

Section: Related Literaturementioning

confidence: 99%

“…First, in line with the proximityconcentration tradeoff literature (e.g. Markusen, 1984;Horstmann and Markusen, 1992;Brainard, 1997;Markusen and Venables, 2000), we focus on a setting wherefirms choose to serve a foreign market either via exports or horizontal FDI and assume a cost asymmetry these two modes: exporting involves a lower fixed cost, while FDI involves lower variable costs. As discussed in Appendix A.3, the logic of our theoretical model applies to a setting where exporting firms chooses whether or not to invest in a foreign distribution network.…”

Section: Export and Fdi Choices Under Uncertaintymentioning

confidence: 99%

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The internationalization process of firms: From exports to FDI

Conconi

Sapir

Zanardi

2016

Journal of International Economics

148

109

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This paper examines firms' choice between serving a foreign market through exports or foreign direct investment (FDI). We begin by unveiling a new empirical regularity: using a unique dataset that allows us to study the dynamics of firms' export and FDI choices in individual destination markets, we show that the overwhelming majority of firms serve a foreign market via exports before establishing affiliates in that market. To explain this pattern, we develop a simple dynamic model of export and FDI choices, in which a firm can only discover its ability to earn profits in a foreign market once it starts serving it. We show that uncertainty can lead to a gradual internationalization process, whereby the firm tests the foreign market via exports, before engaging in FDI. Consistent with the model's predictions, we find that most firms start serving a foreign market through exports; in the first years following export entry, many firms drop out of the foreign market, others survive and expand as exporters, some establish foreign affiliates. We show that a firm's export experience in a foreign market increases its probability of FDI entry; this effect decreases over time and increases with foreign market uncertainty. Our analysis suggests that exports and FDI, although substitutes from a static perspective, may be complements over time, since the knowledge acquired through export experimentation can lead firms to start investing abroad.JEL classifications: F10, D21, F13.

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Section: Related Literaturementioning

confidence: 99%

Section: Export and Fdi Choices Under Uncertaintymentioning

confidence: 99%

The internationalization process of firms: From exports to FDI

Conconi

Sapir

Zanardi

2016

Journal of International Economics

148

109

View full text Add to dashboard Cite

show abstract

“…Our analysis departs from standard theoretical models in this literature (e.g., Horstmann and Markusen, 1992;Brainard, 1993;Markusen and Venables, 2000) and from previous empirical studies (e.g., Brainard, 1997) by studying the role of uncertainty and experimentation in firms' decision. Recent papers by Helpman et al (2004) and Head and Ries (2003) highlight the importance of within-sector productivity differences in explaining a firm's choice over export and horizontal FDI and provide empirical evidence (based on cross-sectional evidence for US and Japanese firms) showing that the least productive firms serve only the domestic market, the relatively more productive firms export, and the most productive firms engage in FDI.…”

Section: Introductionmentioning

confidence: 98%

The Internationalization Process of Firms: From Exports to FDI?

2010

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Papers presented at this conference are made available to a broader audience in the NBB Working Paper Series (www.nbb.be). Terms of use: Documents in Statement of purpose:The purpose of these working papers is to promote the circulation of research results (Research Series) and analytical studies (Documents Series) made within the National Bank of Belgium or presented by external economists in seminars, conferences and conventions organised by the Bank. The aim is therefore to provide a platform for discussion. The opinions expressed are strictly those of the authors and do not necessarily reflect the views of the National Bank of Belgium. OrdersFor orders and information on subscriptions and reductions: National Bank of Belgium, Documentation -Publications service, boulevard de Berlaimont 14, 1000 Brussels. Maurizio Zanardi Université Libre de Bruxelles (ECARES) Preliminary version AbstractWe describe a simple model in which domestic firms decide whether to serve a foreign market through exports or horizontal foreign direct investment (FDI). This choice involves a trade-off between the higher variable trade costs associated with exports and the higher fixed set-up costs associated with establishing foreign subsidiaries. Crucially, firms are uncertain about their profitability in foreign markets and can only learn it by operating there. To obtain market-specific knowledge, firms may follow an "internationalization process", serving the foreign market via exports first and eventually, in some cases, switching to local subsidiary sales. To assess the validity of the predictions of our model, we use firm-level data on export and FDI decisions in individual destination markets for all companies registered in Belgium over the period [1997][1998][1999][2000][2001][2002][2003][2004][2005][2006][2007][2008]. We show that firms' strategies to serve foreign markets depend not only on the variable and fixed costs associated with exports and FDI, but also on the export experience they have acquired in that market.JEL classifications: F10, D21, F13.

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“…This all-or-nothing choice depends upon the demand factors and marginal cost differences identified above, but also upon the importance of firm-specific and plant-specific economies of scale. A horizontal model of MNC operations proposed by Horstmann and Markusen (1992) provides insight regarding what types of firms may choose to establish foreign affiliates and where they might choose to locate them. When there are large firm-specific economies of scale, perhaps from the ability to spread costs of research and development over additional units of output, and there are high costs of serving foreign markets from home country production, establishing foreign affiliates will be desirable.…”

Section: A Aggregate Mnc Production In Alternative Locationsmentioning

confidence: 99%

Empirical asymmetries in foreign direct investment and taxation

Mutti

Grubert

2004

Journal of International Economics

130

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This paper assesses the sensitivity of the operations of multinational corporations (MNCs) to host country taxation. The empirical analysis is based on two different measures of MNC activity by U.S. majority-owned foreign affiliates: panel data for aggregate real gross product in manufacturing that originates in a given host country and micro data for a single year regarding the likelihood of a firm locating in a given host country. The empirical estimates indicate that investment geared toward export markets, rather than the domestic market, is particularly sensitive to host country taxation, that this sensitivity appears to be greater in developing countries than developed countries, and that it is becoming greater over time.

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Endogenous Market Structures in International Trade

Cited by 83 publications

References 0 publications

The internationalization process of firms: From exports to FDI

The internationalization process of firms: From exports to FDI

The Internationalization Process of Firms: From Exports to FDI?

Empirical asymmetries in foreign direct investment and taxation

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