Learning to Sell in New Markets: A Preliminary Analysis of Market Entry by a Multinational Firm

13 Pages Posted: 7 Oct 2018

See all articles by Ignatius J. Horstmann

Ignatius J. Horstmann

University of Toronto - Rotman School of Management; University of Toronto - Institute for Policy Analysis

James R. Markusen

University of Colorado at Boulder - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: November 2018

Abstract

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 derive the optimal sequence of agent contracts and discuss situations in which the multinational contracts initially with a local agent and then converts subsequently to an owned sales operation.

Suggested Citation

Horstmann, Ignatius J. and Markusen, James R., Learning to Sell in New Markets: A Preliminary Analysis of Market Entry by a Multinational Firm (November 2018). Review of International Economics, Vol. 26, Issue 5, pp. 1040-1052, 2018. Available at SSRN: https://ssrn.com/abstract=3261556 or http://dx.doi.org/10.1111/roie.12369

Ignatius J. Horstmann (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/ihorstmann

University of Toronto - Institute for Policy Analysis ( email )

140 St. George Street
Toronto, Ontario M5S 3G6
Canada

James R. Markusen

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309
United States
303-492-0748 (Phone)
303-492-8960 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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