Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/89692
Authors: 
Muendler, Marc-Andreas
Year of Publication: 
2013
Series/Report no.: 
CESifo Working Paper 4558
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 from 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.
Subjects: 
horizontal foreign direct investment
trade under imperfect competition
differentiated product space
monopolization strategies
oligopoly in imperfect markets
JEL: 
F12
F23
L12
L13
Document Type: 
Working Paper

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