The Strategic Role of Information Asymmetry on Demand for the Multinational Enterprise

Moner-Colonques Rafael, Orts Vicente and José Sempere-Monerris
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Moner-Colonques Rafael: Universidad de Valencia, Spain
Orts Vicente: Universitat Jaume I, Castellon - Spain

No 2003002, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: We study how asymmetric information impinge on oligopolistic firms’ decision between direct investment and exports in a game-theoretic model with Bayesian learning. Host firms have superior information about market demand and foreign firms can improve their knowledge if foreign direct investment (FDI) is undertaken. In addition to the well-known tension between the fixed set-up costs of investment, the additional variable costs of exports and oligopoly sizes, the incentive to invest abroad is explained by the strategic learning effect. FDI may be observed even if foreign firms are pessimistic or trade costs are zero. Interestingly, compared with the certainty equivalent, the equilibrium number of investors is larger when foreign firms hold optimistic beliefs or, if these are pessimistic, when the strategic learning effect outweighs the conjecture effect.

Keywords: Asymmetric information; Bayesian learning; FDI; international oligopoly (search for similar items in EconPapers)
JEL-codes: D82 D83 F12 F23 (search for similar items in EconPapers)
Pages: 37
Date: 2003-02-01
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Citations: View citations in EconPapers (1)

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