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Export or merge? Proximity vs. concentration in product space
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Muendler, Marc-Andreas (2014) Export or merge? Proximity vs. concentration in product space. Working Paper. Coventry, UK: Department of Economics, University of Warwick. CAGE Online Working Paper Series, Volume 2014 (Number 180).
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Text (Working paper)
WRAP_180-2014_muendler.pdf - Published Version Download (308Kb) | Preview |
Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
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.
| Item Type: | Working or Discussion Paper (Working Paper) | ||||
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| Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HD Industries. Land use. Labor |
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| Divisions: | Faculty of Social Sciences > Economics | ||||
| Library of Congress Subject Headings (LCSH): | Investments, Foreign , Export marketing , Competition | ||||
| Series Name: | CAGE Online Working Paper Series | ||||
| Publisher: | Department of Economics, University of Warwick | ||||
| Place of Publication: | Coventry, UK | ||||
| Official Date: | January 2014 | ||||
| Dates: |
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| Volume: | Volume 2014 | ||||
| Number: | Number 180 | ||||
| Number of Pages: | 30 | ||||
| Institution: | University of Warwick | ||||
| Status: | Not Peer Reviewed | ||||
| Publication Status: | Published | ||||
| Date of first compliant deposit: | 23 November 2016 | ||||
| Date of first compliant Open Access: | 23 November 2016 |
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