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Multinationals' Mode of Entry in the Presence of Upstream Spillovers

Ragnhild Balsvik

Economica, 2010, vol. 77, issue 306, 334-351

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.

Date: 2010
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