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Asymmetric Demand Information and Foreign Direct Investment

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  • Rafael Moner‐Colonques
  • Vicente Orts
  • José J. Sempere‐Monerris

Abstract

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.

Suggested Citation

  • Rafael Moner‐Colonques & Vicente Orts & José J. Sempere‐Monerris, 2007. "Asymmetric Demand Information and Foreign Direct Investment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(1), pages 93-106, March.
    • Handle: RePEc:bla:scandj:v:109:y:2007:i:1:p:93-106
    DOI: 10.1111/j.1467-9442.2007.00482.x
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    References listed on IDEAS

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    1. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, April.
    2. Horstmann, Ignatius J & Markusen, James R, 1987. "Strategic Investments and the Development of Multinationals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 109-121, February.
    3. Rafael, MONER-COLONQUES & Vicente, ORTS & José J., SEMPERE-MONERRIS, 2003. "The Strategic Role of Information Asymmetry on Demand for the Multinational Enterprise," LIDAM Discussion Papers IRES 2003002, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
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    Cited by:

    1. De Santis, Roberto A. & Ehling, Paul, 2007. "Do international portfolio investors follow firms' foreign investment decisions?," Working Paper Series 815, European Central Bank.
    2. Onur A. Koska & Ngo Van Long & Frank Stähler, 2018. "Foreign direct investment as a signal," Review of International Economics, Wiley Blackwell, vol. 26(1), pages 60-83, February.
    3. GEORGANTZIS, Nikolaos & moner-colonques, Rafael & ORTS, Vicente & SEMPERE-MONERRIS, José J., 2012. "Theoretical and experimental insights on firms’ internationalization decisions under uncertainty," LIDAM Discussion Papers CORE 2012041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Wim Suyker & P. Buitelaar & Henri de Groot, 2007. "India and the Dutch economy; stylised facts and prospects," CPB Document 155, CPB Netherlands Bureau for Economic Policy Analysis.
    5. Maja Barac & Rafael Moner‐Colonques, 2022. "Leadership in internationalization strategies," Manchester School, University of Manchester, vol. 90(3), pages 293-318, June.

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