Capacity Choice and Preemption of a Foreign Market

Stefano Vannini

Review of International Economics, 1998, vol. 6, issue 3, 417-26

Abstract: This paper studies the strategic role of foreign direct investments (FDIs) when specified as a device for a multinational enterprise (MNE) to precommit capacity. This captures the idea of an MNE preempting the host market or, at least, achieving more profitable outcomes by setting the initial conditions of the post-entry competition with local rivals. Here, the MNE chooses FDI even if "exporting costs" (e.g., tariffs) are not considered. Market preemption is an alternative justification for FDI, but not the only one; sometimes the tradeoff between advantages of strategic leadership and cost of establishing offshore facilities, alone, justifies FDI. Copyright 1998 by Blackwell Publishing Ltd.

Date: 1998
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