Productivity Differences and Foreign Market Entry in an Oligopolistic Industry

Abstract

We show how productivity differences between foreign and indigenous firms affect the choice of the foreign market entry strategy. We identify the conditions necessary for the adoption of a particular strategy depending on the competing firms’ productivity differences as well as each strategy’s cost. In particular, we study tradeoffs between exporting and JV as well as between JV and WOS that were neglected in the firm heterogeneity literature. We find that high productivity differences led the foreign firm to enter host markets via WOS or exporting monopoly, while in the case of smaller productivity differences they entered via different types of JV. The share in joint venture depended positively on the productivity difference and negatively on trade and investment costs.