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• W1602605429 abstract "[Author Affiliation]Rafael Moner-Colonques, *Department of Economic Analysis and ERI-CES, University of Valencia, Campus dels Tarongers, Avda, dels Tarongers s/n, 46022-Valencia, Spain; Rafael.Moner@uv.es; corresponding authorVicente Orts, [dagger]Department of Economics and International Economics Institute, University Jaume I, Castellon, Campus Riu Sec, Avda. Sos Baynat, s/n, 12006-Castellon, Spain; orts@eco.uji.esJose J Sempere-Monerris, [double dagger]Department of Economic Analysis and ERI-CES, University of Valencia, Campus dels Tarongers, Avda, dels Tarongers s/n, 46022-Valencia, Spain; Jose.J.Sempere@uv.es[Acknowledgment]We would like to thank Christos Constantatos, Amparo Urbano, the editor Laura Razzolini, and two referees for their useful comments and suggestions. We gratefully acknowledge the financial support from Spanish Ministerio de Educacion y Ciencia and FEDER projects SEJ2004-07554/ECON and SEJ2005-08764/ECON.1. IntroductionEntry into foreign markets entails a number of difficulties. One such difficulty is a lack of knowledge of the market characteristics, which may persuade foreign firms to not enter the domestic market. This paper elaborates on the idea that domestic firms hold an informational advantage over foreign firms (see Hirsch 1976; Scherer 1999) in a two-period model of entry mode choice. We offer a complementary explanation for a foreign firm's choice between foreign direct investment (FDI) and exports when FDI is the entry mode that provides better knowledge of local demand. Then, our contribution focuses on a firm's incentive to become multinational and exploit the advantages of being close to the market (market-seeking FDI) rather than to exploit cost advantages in different locations (efficiency-seeking FDI).The foreign expansion of firms, through exports and FDI, is very likely to involve uncertainty, since the environment in their home market is different from the one they will face in foreign markets. In fact, dissimilarities of any kind create obstacles to successful entry (Buckley and Ghauri 1999). Informational asymmetries between local and foreign brands that can eventually affect the mode of entry may be particularly significant in consumer goods industries, such as consumer electronics, pharmaceuticals, software, automobiles, household appliances, and personal computers. The hypothesis in our paper is reasonably intuitive; yet, to the best of our knowledge, it has not received much attention in the literature--a couple of notable exceptions are Horstmann and Markusen (1996) and Jain and Mirman (2001). In particular, we analyze the role of differential information in determining the foreign firm's entry mode decision.The model that we examine assumes that (inverse) demand is linear and stochastic. Specifically, the demand intercept consists of an unknown recurrent term, which captures the idiosyncratic features of local economy, and an additive period-specific random shock. The host firm, which is only informed about the recurrent term, is the sole producer in the initial time period, and this generates a noisy market signal.1 Then the foreign firm uses the information conveyed by the observation of the first-period output choice and price to update its prior beliefs about the stochastic demand in a Bayesian fashion. The second period unfolds in two stages. In the first stage, the foreign firm selects its mode of entry, which has some implications. If it enters as an investor then it incurs a fixed cost, whereas it incurs a variable unit cost if it enters as an exporter. Furthermore, if investment takes place then the foreign firm learns the recurrent term of the stochastic demand; otherwise, it employs its updated beliefs in the second-stage decisions. There is Cournot competition in the second stage, which amounts to either solving a duopoly under symmetric information and identical marginal costs when entry occurs through direct investment, or solving an asymmetric duopoly both in terms of information and marginal costs when entry is via exports. …" @default.
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• W1602605429 title "Entry in Foreign Markets under Asymmetric Information and Demand Uncertainty" @default.
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