A Strategy for the Foreign Market Penetration under Complete Information

Seon Jae Kim and Young Han Kim
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Seon Jae Kim: Paichai University
Young Han Kim: Samsung Economic Research Institute
Authors registered in the RePEc Author Service: Young-Han Kim

Korean Economic Review, 1996, vol. 12, issue 2, 47-69

Abstract: This study examines the optimal foreign market penetration strategy of a domestic firm when the firm engages in Bertrand competition with an incumbent firm in a foreign market. The study demonstrates that under complete information about the product quality of the entrant firm, the entrant firm prefers to choose a less expensive entry mode when the foreign consumers' marginal rate of substitution between quality and price is high. A high import tariff of the foreign government induces the entrant firm to prefer FDI to exporting if the MRS is high and FDI has a tariff-jumping effect. If the incumbent firm is a local firm, the entrant firm is more reserved in choosing FDI. When the incumbent firm is a local firm, an import tare improves foreign social welfare only when MRS is low. When MRS is high, the import tariff deteriorates social welfare of the foreign country.

Date: 1996
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