Private Cost Information and the Multinational Enterprise

Abstract

This paper explores the informational role of plant location decisions for the multinational enterprise. When information about costs is incomplete, the location of a plant will be chosen not only for its impact on actual production costs, but also for Its impact on the perception of costs as held by foreign rivals. We show that the latter consideration, which can arise only in the presence of asymmetric information about costs, may lead to a decision to multinationalize even though actual production costs are higher as a result. As such, the informational role of plant location decisions is a potentially important element in understanding the behavior of the multinational firm.