Foreign Market Entry Strategies under Asymmetric Information *

Alberto Nastasi and Pierfrancesco Reverberi

Review of International Economics, 2007, vol. 15, issue 4, pages 758-781

Abstract: A home firm signals her private cost information by expanding in a foreign firm's country. Credible signaling to deter counter-entry may occur through a direct investment (but not through exports), and may even entail entering an unprofitable market. While this produces social benefits, uninformative signaling may be welfare-reducing. Hence, we argue that moderate to high location costs may be socially desirable. We also show that there are not simple monotonic relationships between technology/demand conditions and firms' entry modes. Thus, the signaling interpretation of international expansion makes it possible to explain some controversial empirical findings on a theoretical ground. Copyright © 2007 The Authors; Journal compilation © 2007 Blackwell Publishing Ltd.

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