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

Ignatius Horstmann and James Markusen

International Economic Review, 1996, vol. 37, issue 1, 1-19

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.

Date: 1996
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