Strategic Entry Mode Decision of a Firm: Foreign Direct Investments and Industrial Organizations

Abstract

　The purpose of this paper is to analyze a foreign firm’s entry mode decisions by focusing on small-scale market overseas in a duopoly market.　In particular, the ways to procure relation-specific intermediates and level of the foreign direct investment prior to the customization for the inputs interact the market mechanism of industrial organization, which has a strategic impact on the entry mode decision of the firms.

　Unlike monopolistic competition models, vertical supply-chain transaction in a duopoly market and rival firm’s productivity strategically affect entry-mode decision of the final producer’s as well as the intermediate outputs of the supplier’s.　Therefore, the disparity of bargaining weight over the rents of the both side interacts the industrial organization through ex ante investment level of the final producer’s dependent on the market share.

　As a result of the analysis, decision-making of outsourcing inputs in a duopoly market is likely to occur when the final goods manufacturer with less productivity has lower bargaining weight than the supplier’s one over the total revenue.　On the other hand, the manufacturer with higher bargaining weight promotes a vertically integrated production in a monopoly market by increasing its level of ex ante investment in preparation for the hold-up problem of the intermediate.

JEL Classifications:D23, D43, F13, F23, L13, L24