Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise

Ignatius Horstmann and James Markusen

No 5029, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We consider the multinational firm's decision on whether to enter a new market immediately via direct investment or to contract initially with a local agent and (possibly) invest later. Use of a local agent allows the multinational to avoid costly mistakes by finding out if the market is large enough to support direct investment. However, the agent is able to extract information rents from the multinational due to being better informed about market characteristics. We find that direct investment is the desirable mode of entry when the market is on average large and there is little down- side risk in expected profits.

JEL-codes: F23 (search for similar items in EconPapers)
Date: 1995-02
Note: ITI
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as International Economic Review, vol. 37, 1996, pp. 1-20.

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Journal Article: Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise (1996)
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