Export or merge? Proximity vs. concentration in product space

Marc-Andreas Muendler

Asia-Pacific Journal of Accounting & Economics, 2014, vol. 21, issue 1, 35-57

Abstract: This paper proposes a proximity-concentration tradeoff in product space as a determinant of horizontal foreign direct investment (FDI). Firms that enter a foreign market by exporting are able to capture consumer surplus by introducing a differentiated product with characteristics that the incumbent cannot match. In relatively globalized product space, in contrast, consumers perceive an entrant's difference to existing products as less pronounced so a consumer's virtual distance costs in product space are lower and a merger with an incumbent (horizontal FDI) offers pricing power that allows the entrant to extract consumer rent. Lower physical trade costs of shipping make Bertrand price competition fiercer in differentiated product space and can provide an additional incentive for a merger. A basic product space model with a linear Hotelling setup can therefore explain why FDI has become more frequent in recent periods in the presence of falling trade costs. Cross-border merger and acquisitions data support the model's prediction that horizontal FDI grows relatively faster than exports in differentiated goods industries, compared to homogeneous goods industries.

Date: 2014
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/16081625.2014.874939 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Export or merge? Proximity vs. concentration in product space (2014)
Working Paper: Export or Merge? Proximity vs. Concentration in Product Space (2014)
Working Paper: Export or Merge? Proximity vs. Concentration in Product Space (2013)
Working Paper: Export or Merge? Proximity vs. Concentration in Product Space (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:raaexx:v:21:y:2014:i:1:p:35-57

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/raae20

DOI: 10.1080/16081625.2014.874939

Access Statistics for this article

Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

More articles in Asia-Pacific Journal of Accounting & Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().