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Foreign Market Penetration Under Incomplete Information about Product Quality

Author

Listed:
  • Seon Jae Kim

    (Paichai University)

  • Young Han Kim

    (Samsung Economic Research Institute)

Abstract

This paper examines the optimal strategies of a firm to introduce a new product into a foreign market and the effects of the government policy under incomplete information about product quality. The paper demonstrates that it is optimal for a high quality firm (H) to enter the foreign market by choosing foreign direct investment (FDI) when the sunk cost of FDI is sufficiently high, and when foreign consumers are more concerned about product quality because the firm am signal high quality by the choice of the expensive FDL An export subsidy of the domestic government improves domestic social welfare because the subsidy reduces the upward distortion of the separating price, which is the result of informational externality.

Suggested Citation

  • Seon Jae Kim & Young Han Kim, 1997. "Foreign Market Penetration Under Incomplete Information about Product Quality," Korean Economic Review, Korean Economic Association, vol. 13(2), pages 51-74.
    • Handle: RePEc:kea:keappr:ker-199712-13-2-04
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