NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Ignatius J. Horstmann, James R. Markusen

NBER Working Paper No. 5029
Issued in February 1995
NBER Program(s):   ITI

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.

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

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