Export or merge? Proximity vs. concentration in product space

Marc-Andreas Muendler

University of California at San Diego, Economics Working Paper Series from Department of Economics, UC San Diego

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. © 2014 City University of Hong Kong and National Taiwan University.

Keywords: Horizontal foreign direct investment; trade under imperfect competition; differentiated product space; monopolization strategies; oligopoly in imperfect markets; horizontal foreign direct investment; Economics; Commerce; Management; Tourism and Services (search for similar items in EconPapers)
Date: 2014-01-02
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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 (2013)
Working Paper: Export or Merge? Proximity vs. Concentration in Product Space (2013)
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