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Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise

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  • Horstmann, Ignatius J
  • Markusen, James R

Abstract

The authors consider the multinational firm's decision on whether to enter a new market immediately via direct investment or to contract initially with a local agent and (possibly) invest later. Use of a local agent allows the multinational to avoid costly mistakes by finding out if the market is large enough to support direct investment. However, the agent is able to extract information rents from the multinational due to being better informed about market characteristics. The authors find that direct investment is the desirable mode of entry when the market is on average large and the variability in profits is not. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Horstmann, Ignatius J & Markusen, James R, 1996. "Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(1), pages 1-19, February.
    • Handle: RePEc:ier:iecrev:v:37:y:1996:i:1:p:1-19
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    References listed on IDEAS

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    1. Wilfred J. Ethier & James R. Markusen, 2021. "Multinational firms, technology diffusion and trade," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 7, pages 131-158, World Scientific Publishing Co. Pte. Ltd..
    2. Ignatius Horstmann & James R. Markusen, 1987. "Licensing versus Direct Investment: A Model of Internalization by the Multinational Enterprise," Canadian Journal of Economics, Canadian Economics Association, vol. 20(3), pages 464-481, August.
    3. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
    4. Wilfred J. Ethier, 1986. "The Multinational Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 805-833.
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    More about this item

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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