Foreign Market Penetration Under Incomplete Information about Product Quality

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, 1997, vol. 13, issue 2, 51-74

Abstract: This paper examines the optimal strategies of a firm to introduce a new product into a foreign market and the effects of the government policy under incomplete information about product quality. The paper demonstrates that it is optimal for a high quality firm (H) to enter the foreign market by choosing foreign direct investment (FDI) when the sunk cost of FDI is sufficiently high, and when foreign consumers are more concerned about product quality because the firm am signal high quality by the choice of the expensive FDL An export subsidy of the domestic government improves domestic social welfare because the subsidy reduces the upward distortion of the separating price, which is the result of informational externality.

Keywords: FDI; Foreign Market; Penetration; Incomplete Information (search for similar items in EconPapers)
Date: 1997
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