Multinationals' Mode of Entry in the Presence of Upstream Spillovers

Abstract

Multinationals' mode of foreign expansion may depend on their expectations of spillovers. I consider a monopolist with a vertical production structure where outsourcing of intermediates to a host country firm is one of three possible entry modes. Spillovers generate threat of entry of a new input producer. With incomplete outsourcing contracts that result in the two firms bargaining over how to share the potential surplus, upstream spillovers do not necessarily benefit the downstream multinational. If the multinational instead allows the supplier to set the price of intermediates (successive monopoly), it clearly benefits from upstream spillovers. Copyright (c) The London School of Economics and Political Science 2009.

Location for Foreign Direct Investment in Vertically Related Markets

“…These studies provide strong evidence on the presence of VTT and find that backward linkages with foreign affiliates sharply increase the productivity of domestic suppliers. In the theoretical literature, in line with the empirical evidence and with us, Pack and Saggi (), Goh (), Lin and Saggi () and Balsvik () allow for VTT under FDI. In particular, Pack and Saggi () examine how downstream FDI and VTT in the presence of spillovers among the domestic upstream firms can lead to both upstream and downstream entry.…”

“…Traditionally, the literature on FDI with strategic interactions focuses on one‐tier industries. Recently though, a number of papers on FDI by Pack and Saggi (), Goh (), Lin and Saggi (, ), Balsvik () and Carluccio and Fally () consider a vertical market structure , . Lin and Saggi () analyze the incentives for upstream and downstream FDI by two separate firms and their host country effects.…”

“…In particular, Pack and Saggi () examine how downstream FDI and VTT in the presence of spillovers among the domestic upstream firms can lead to both upstream and downstream entry. Building on their model, Goh () and Balsvik () endogenize the level of VTT. The former paper endogenizes the technological efforts of the local upstream firms and the latter the MNE's mode of entry.…”

Foreign direct investment in vertically related markets

“…In our main analysis, as in a number of papers in the FDI literature (Mattoo et al 2004;Balsvik 2010;Lin andSaggi 2007, 2011;Qiu and Wang 2011;Carluccio and Fally 2013), we have not included exports as an alternative to FDI. As argued, the exclusion of exports could be due to the product's nature that requires local presence or to high transportation costs or tariffs.…”

Foreign direct investment, input prices, and host country welfare

“…Carluccio and Fally () look at the relationship between upstream technology adoption and downstream foreign entry. Furthermore, in the context of vertically related markets, spillovers and vertical technology transfers via FDI have also been extensively analyzed—see, for example, Balsvik (), Lin and Saggi (), Ma (, ), Milliou (), and Milliou and Pavlou (), Pack and Saggi (), among others. In contrast to these papers, except for Milliou and Pavlou (), we allow for both greenfield investment and cross‐border M&A when analyzing the choice of foreign entry mode.…”