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Exploring New Markets: The Multinational Firm's Choice of Direct Investment versus Licensing
University of Western Ontario.
University of Colorado, Boulder.
1992 (English)Report (Other academic)
Abstract [en]

This paper contributes to a literature which seeks to understand the nature of overseas investments by multinationals, but sheds light on the more general problem facing firms confronting new markets. The firm is assumed ignorant of the state of demand in the new market, a problem given the existence of large fixed and prtially sunk costs of opening a new plant or sales branch. The firm's alternative is to use an informed agent who is currently producing or selling related products in that market. The agent understands that he will be dumped if he reveals that the state of demand is high. This sets up a contracting problem in which the firm must share rents with the agent in the first period in order to extract the information about the true state of demand. The optimal contract and the implied level of agency costs are analyzed. If the level of agency costs are high, inefficient direct investment may take place.

Place, publisher, year, edition, pages
Stockholm: IIES , 1992. , 33 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 528
National Category
URN: urn:nbn:se:su:diva-41846OAI: diva2:337954
Published in connection with a visit at the IIES.Available from: 2010-08-10 Created: 2010-08-10 Last updated: 2010-08-10

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