Relative Market Size Research Articles

A multinational firm’s global manufacturing location and outsourcing strategies

Due to rising labor costs in China and trade friction, many multinational firms (MNFs) consider moving manufacturing outside China to Southeast Asian Countries. Based on observations in real world, we build a three-tier supply chain model consisting of one component supplier, two contract manufacturers (CMs), an MNF, and a local original equipment manufacturer (OEM). The MNF monopolizes the market in country 1 (e.g., U.S.), but competes in country 2 (e.g., China) with the local OEM. The component supplier and one CM are located in country 2, and the other CM is located in country 3 (e.g., a country in Southeast Asia). We investigate the MNF’s global manufacturing location and procurement outsourcing strategies with considerations of tariffs and market environments. Currently, the MNF outsources its manufacturing to the CM in country 2, and decides whether to continue the cooperation with the current CM or develop a new CM in country 3. The MNF also considers whether to outsource its component procurement to the corresponding CM. Our study reveals that the MNF’s optimal strategy depends on the relative market sizes, the fixed cost of developing a new CM, as well as the manufacturing cost and tariff disadvantages in country 2. Interestingly, we find that the tariff disadvantage in country 2 does not always motivate the MNF to cooperate with the CM in country 3. Instead, an appropriate tariff may be beneficial to the MNF that manufactures in country 2. In addition, the MNF’s preferred procurement strategy is related to its manufacturing location. When cooperating with the CM in country 2, the MNF would switch from direct procurement to outsourced procurement as the market size of country 1 increases.

Export Market Size Matters: The Effect of the Market Size of Export Destinations on Manufacturing Growth

Literature contends that the manufacturing sector is crucial for economic development, and it is conventional wisdom that exports drive manufacturing growth. However, it has yet to be established empirically whether the market size of export destinations is an essential factor in explaining diverging regional and sectoral manufacturing growth patterns. This article argues that accessing a few large external markets reduces entry costs, increases expectations of economies of scale, and fosters capital formation. To test this hypothesis, we construct a novel Relative Export Market Size (REMS) index that measures whether the share of sectoral exports destined to large economies in one region is higher than in other regions. Using a PVAR model with fixed effects, we verify the impact of the REMS index on value added, employment, and capital accumulation of 129 manufacturing sectors in 23 regions in Colombia from 1992 to 2017. The obtained results show that exporting to larger markets positively impacts employment, capital formation, and value added per capita of manufacturing sectors at a regional level. This finding indicates that exporting to the world’s largest market helps develop competitive manufacturing sectors.

Optimal responses of multinational firms towards non-tariff or tariff barrier: Onshore versus offshore manufacturing

Trade barriers are typically provided by emerging economies to impede multinational firms (MNFs) and safeguard their small and medium-sized local firms. So far, it is still unclear how MNFs modify their manufacturing strategies to better manage trade barriers. As a result, this paper systematically examines how MNFs respond to various trade barriers including non-tariff and tariff barriers, where both onshore (ONM) and offshore (OFM) manufacturing are feasible. Three important and intriguing findings of this research can be distilled via the definition of the relative market size. (1) Under ONM, trade barriers do undoubtedly aid in the growth of local firms in emerging economics, and the relative market size can have an impact on the MNF’s marketing strategy. Also, the MNF exhibits a bargaining effect when the relative market size is bigger, meaning that trade barriers will not result in a decline in the MNF’s operational performance. (2) Under either of trade barriers, the MNF can base on the relative market size to select OFM or ONM. That is, when the relative market size is sufficient, the MNF prefers to use ONM to guarantee a stable supply process even while facing trade barriers; otherwise, the MNF is advised to adopt OFM to avoid trade barriers and occupy greater product shares in the emerging market. (3) Regarding emerging economics, trade barriers are advised to be implemented if their local enterprises are not sufficiently developed. And as their local firms become more reliable, trade barriers are ineffective to restraint the MNF since the MNF is willing to shift its production base.

Between the Eurozone crisis and the Brexit: the decade of British outward FDI into Europe

This paper investigates the determinants of outward foreign direct investment (OFDI) of British multinational firms in the European Union (EU) and the European Free Trade Association members across 2009–2019 using Bayesian model averaging. We find evidence that supports the existence and dynamic behavior of the East–West structure of FDI between three groups of countries: core-EU, Central and Eastern European economies (CEE), and the Nordics. Further, we document the importance of relative market size, urbanization, the rule of law in attaining horizontal FDI in the core-EU economies. In turn, infrastructure spending and enhanced political stability are the most important drivers for FDI in CEE (post-2000 accession). Finally, our results highlight the negative effects of the Eurozone crisis and Brexit anticipation on British OFDI activity in the region. The findings remain robust when accounting for potential MNE profit shifting to partners such as Ireland, Luxembourg, and alike.

Welfare and research and development incentive effects of uniform and differential pricing schemes

This paper is about the application of optimization methods to the analysis of three pricing schemes adopted by one manufacturer in a two-country model of production and trade. The analysis focuses on pricing schemes—one uniform pricing scheme, and two differential pricing schemes—for which there is no competition coming from the so-called parallel trade. This term denotes the practice of buying a patented product like a medicine in one market at one price, then re-selling it in a second so-called gray market at a higher price, on a parallel distribution chain where it competes with the official distribution chain. The adoption of pricing schemes under which parallel trade does not arise can prevent the occurrence of its well-documented negative effects. In the work, a comparison of the optimal solutions to the optimization problems modeling the three pricing schemes is performed. More specifically, conditions are found under which the two differential pricing schemes are more desirable from several points of view (e.g., incentive for the manufacturer to do Research and Development, product accessibility, global welfare) than the uniform pricing scheme. In particular, we prove that, compared to the uniform pricing scheme, the two differential pricing schemes increase the incentive for the manufacturer to invest in Research and Development. We also prove that they serve both countries under a larger range of values for the relative market size, making the product more accessible to consumers in the lower price country. Moreover, we provide a sufficient condition under which price discrimination is more efficient from a global welfare perspective than uniform pricing. The analysis applies in particular to the case of the European Single Market for medicines. Compared to other studies, our work takes into account also the possible presence in all the optimization problems of a positive constant marginal cost of production, showing that it can have non-negligible effects on the results of the analysis. As an important contribution, indeed, our analysis clarifies the conditions—which have been overlooked in the literature about the mechanisms adopted to prevent parallel trade occurrence—that allow/do not allow one to neglect the presence of this factor. Such conditions are related, e.g., to the comparison between the positive constant marginal cost of production, the parallel trade cost per-unit, and the maximal price that can be effectively charged to the consumers in the lower price country.

The role of side payment requirements in free trade negotiations under asymmetric information

Recent free trade agreements (FTAs) have two outstanding features: they have been drawn among countries with different market size, and relatively small market-sized countries have offered implicit side payments (i.e. concessions pertaining to non-trade aspects). The present study examines FTA negotiations between two asymmetric market-sized countries (one large and the other small) in which the former is unaware of the latter's demand and is allowed to require the latter to transfer side payments. The analysis clarifies that the side payments required by the large country depend on its beliefs about the small country's demand. If the large country expects that the small country's demand is sufficiently high, the FTAs derived from the former's requirement for moderate side payments could be either building blocks or stumbling blocks to global free trade, depending not only on each country's relative market size but also on the required side payments. Otherwise, the large country's requirement for huge side payments leads to or prevents FTAs that serve as stumbling blocks to global free trade, depending on the small country's actual demand.

Uniform and targeted informative advertising with asymmetric customer loyalty

AbstractWe model optimal firm pricing and advertising intensity strategies under both uniform and targeted advertising regimes in a duopoly market in which firms have asymmetric loyal market shares and must engage in costly informative advertising to attract customers. In addition to loyal customers who only purchase from their preferred firm, there are shoppers who purchase at the lowest advertised price. Under uniform advertising, prices are communicated to the entire market while under targeted advertising the firm can limit advertising to its own loyal customers or to its loyal customers and the shoppers. Our main results explore the strategic trade‐off between advertising intensity and price competition and demonstrate how optimal firm pricing, advertising strategies, and equilibrium outcomes differ with the relative size of a firm's loyal market and with the advertising regime. We also show that targeted advertising may or may not increase social welfare, and that it increases consumer surplus only if the cost of advertising is sufficiently high. In addition, it is possible that the firm with the larger loyal market earns lower profits under targeted rather than uniform advertising. Notwithstanding this, in an extension we show firms generally have an incentive to invest ex‐ante in targeting technology.

Time-Newsweek Cover Story Game

Dixit and Nalebuff (1991) provided a simple example of how Time and Newsweek compete with each other through their cover story decisions. This paper goes beyond this example to specify the conditions under which the two competing magazines (Time and Newsweek) issue the same or different cover stories. The main result of this paper can be described as follows. The difference in relative market power and relative market size of story A to story B are critical in determining the cover story decision (business strategy). If the market size of potential story A relative to story B is sufficiently large, then both magazines may issue the same cover story. However, if the market size of potential story A relative to story B is not large enough, the relative market power (rather than the relative market size) becomes more relevant and both magazines may issue different cover stories. This paper provides empirical evidence that supports our hypothesis and shows how our finding is related to Hotelling’s paradox.

Two Decades of Global Progress in Authorized Advanced Therapy Medicinal Products: An Emerging Revolution in Therapeutic Strategies.

The introduction of advanced therapy medicinal products (ATMPs) to the global pharma market has been revolutionizing the pharmaceutical industry and has opened new routes for treating various types of cancers and incurable diseases. In the past two decades, a noticeable part of clinical practices has been devoting progressively to these products. The first step to develop such an ATMP product is to be familiar with other approved products to obtain a general view about this industry trend. The present paper depicts an overall perspective of approved ATMPs in different countries, while reflecting the degree of their success in a clinical point of view and highlighting their main safety issues and also related market size as a whole. In this regard, published articles regarding safety, efficacy, and market size of approved ATMPs were reviewed using the search engines PubMed, Scopus, and Google Scholar. For some products which the related papers were not available, data on the relevant company website were referenced. In this descriptive study, we have introduced and classified approved cell, gene, and tissue engineering-based products by different regulatory agencies, along with their characteristics, manufacturer, indication, approval date, related regulatory agency, dosage, product description, price and published data about their safety and efficacy. In addition, to gain insights about the commercial situation of each product, we have gathered accessible sale reports and market size information that pertain to some of these products.

Global Emission Taxes and Port Privatization Policies under International Competition

This study considers two asymmetric ports under international competition in which each country has a hub port and a private manufacturer and investigates strategic interactions between port privatization and emission tax policies. We emphasize the key role of the relative market size between the two countries and show that in a privatization choice game, port privatization is a dominant strategy in a larger country, but it will be chosen by a smaller country only if its relative market size is not so small. We also show that the coordination of global emission taxes before privatization choices can induce the equilibrium of the game to be globally optimal when the emission tax is relatively high. This finding provides an important policy implication on the climate change that coordinated global environmental policy is imperatively required in the port privatization policy.

Excessive vs. insufficient entry in spatial models: When product design and market size matter

Under spatial product differentiation and product design, we identify conditions for either excessive or insufficient firm entry. We extend previous settings, based on the Salop circular model, to analyze the combined role of positive demand elasticity and endogenous targeted product design. First, we show that, given the number of firms, the equilibrium level of targeted design is either excessive or insufficient, depending on demand elasticity. Second, with free entry, we show that the degree of targeted product design increases with the relative market size and decreases with demand elasticity. Based on these effects, the interplay between demand elasticity and market size yields novel welfare results. In particular, we show that excessive entry always occurs for small demand elasticities but, for large demand elasticities, market size matters: entry is insufficient in small and large market sizes, but it is excessive in intermediate market sizes.

Jointly produced metal markets are endogenously unstable

The production of many minerals and fossil fuels is unstable, and managing volatilities is an important task for managers. External shocks have been regarded as sources of market instability, but a recent empirical analysis showed that external shocks do not fully explain the price volatilities of coproducts. The present study provides an analytic model that identifies the endogenous sources of the market instability of jointly produced metals using a game-theoretic approach. In this model, a joint product company that produces both a primary product and a by-product competes with two firms: 1) a primary product company that produces only primary products in the primary market; and 2) a by-product company that produces only the by-product in the secondary market. This study models the competition among these firms as single-period, sequential quantity competitions. The results indicate that competition causes market instability if the joint product firm sets its production after observing the decisions of other firms and if the joint product firm has efficient capacity. The numerical example, which is motivated by zinc and indium markets, suggests that the endogenous factor affected the markets in 2013. Moreover, endogenous instability will be more important as the price sensitivity to production quantity increases, the relative size of the by-product market grows, and the by-product production technology improves.

Micro-specific Profitability Factors of the Serbian Insurance Industry: A Panel Data Estimation

The paper investigates the main micro-specific profitability determinants of the insurance industry in Serbia, covering the period 2008–2016. Data set includes accounting ratios for 19 universal insurers, officially reported by the National Bank of Serbia (NBS). We have estimated the fixed effects model using the OLS and GLM estimation procedures, with return on asset (ROA), return on equity (ROE) and return on total premium (ROTP) as the response variables. The estimated results from different models are quite consistent, with some minor deviations related mainly to the magnitude of the effects. Specifically, there is a trade-off between liquidity and profitability, and the insurance companies exploit economies of scale extensively. Loss and risk exposure have significant adverse effect on profitability, while productivity proved to be not significant. In addition, the relative market power (market position) and size have significant positive impact on profitability, while business specialization favors insurance over reinsurance, particularly the life-insurance business, as well as the business specialization dummies (insurance vs. reinsurance, life vs. nonlife insurance). Consequently, an optimal profitability strategy should be based on mergers and acquisitions, appropriate risk-taking and risk-management practices, and business sophistication through specialization. In addition, the companies should weight costs and benefits of keeping an excess of liquid reserves. The results also indicate further market concentration due to the size effects, and it could result in higher prices and lower quality of the services. This in turn imposes the new regulatory challenges in terms of the optimal antitrust strategy and appropriate quality control. The implications of these findings are applicable to other Western Balkan countries, especially to Bosnia and Herzegovina and Macedonia.

What attracts multinational enterprises from the new EU member states to Poland?

The main goal of this study is to examine empirically the determinants of multinational activity of firms from the new EU-12 member states in Poland during the period 1990–2014 using the negative binomial model. In particular, we test the predictions of competing theoretical models of the multinational enterprise to identify the investment motives for undertaking foreign direct investment in Poland. In addition to traditional country-pair characteristics such as absolute and relative market size and differences in relative factor endowments, in this study we account for cultural differences between the host and partner countries that may affect the cost of foreign investment. The assembled empirical evidence points to both market access and efficiency seeking as the main reasons for undertaking foreign direct investment in Poland by multinational enterprises based in the new EU-12 member states. However, cultural proximity does not seem to be an important factor in explaining the extent of multinational activity in Poland.

Universal intellectual property rights: Too much of a good thing?

Developing countries’ incentives to protect intellectual property rights (IPR) are studied in a model of vertical innovation. Enforcing IPR boosts export opportunities to advanced economies but slows down technological transfers and incentives to invest in R&D. Asymmetric protection of IPR, strict in the North and lax in the South, leads in many cases to a higher world level of innovation than universal enforcement. IPR enforcement is U-shaped in the relative size of the export market compared to the domestic one: rich countries and small/poor countries enforce IPR, the former to protect their innovations, the latter to access foreign markets, while large emerging countries free-ride on rich countries’ technology to serve their internal demand.

Insight towards Adoption of International Financial Reporting Standards (IFRS) in India

This study aims at understanding the perception towards adoption of International, Financial Reporting Standards (IFRS) in India. For the purpose, the Hofstede dimensions on perception is reviewed. The globalization creates an increased need for communication in the terms of language, awareness of culture differences and domestic customs. Moreover, the financial communication such as accounting and financial results is just as important for business leaders and employees to master. Hence Proponents of International Financial Reporting Standards (IFRS) claim that mandating a uniform set of accounting standards improves financial statement comparability that in turn attracts greater cross-border investment. Ministry of Corporate Affairs (MCA) has decided to go for full convergence of IFRS by 2018 through IND AS. Using Hofstede dimensions along with economic growth, demographic profile of respondents, economic openness and relative capital market size the logit regressions are analyzed. Structural Equation Modelling (SEM) is applied to test the confirmation factor analysis (CFA), accordingly path diagram is drawn. The primary data was collected with well structed questionnaire from auditors, accounting professionals working in companies and academicians Drop-off survey was conducted and the targeted sample size is 400 across India. The results indicate that as India is developing country, the financial structure is more likely to adopt IFRS. The Hofstede dimensions do have a significant impact as an exploratory variable, suggesting that Indian financial system do need to be more optimistic in adopting these standards to meet the global requirements of the stakeholders.

A Generalized Growth Model and the Direction of Technological Progress

Based on a general growth model, this paper finds that the steady-state direction of technological progress is determined by the scale return of the production function and the relative factor supply elasticities. A specific version of that model extends Acemoglu (2002) to provide the underlying determinants of the supply elasticities and demonstrates that the relative price (Hicks, 1932) and relative market size (Acemoglu, 2002) have only a short-term impact on the direction of technological progress. A consequence of the analysis is that the steady-state technological progress is purely labor-augmenting (i.e. delivers Uzawa’s steady-state theorem) if and only if the scale return of the production function is constant and the supply elasticity of capital is infinite. Analogously, an infinite labor supply elasticity is required if labor-augmenting technological progress is to be excluded prior to the Industrial Revolution. Accordingly, changing factor supply elasticities may have induced the Industrial Revolution.

Extreme dependence and risk spillovers across north american equity markets

This study analyzes risk spillovers across North American equity markets over 1995–2016. Downside and upside Conditional Value-at-Risk (CoVaR) are estimated after modeling the dynamic dependence structure for each equity market pair using generalized autoregressive score (GAS) copulas. US-CAN and CAN-MX dynamic correlations trend upwards over the sample period while the US-CAN correlation fluctuates around a higher long-run average. Conditional tail dependence is symmetric and significantly higher following the Global Financial Crisis (GFC) in all cases, implying greater co-movement under extreme economic conditions. Downside and upside risk spillovers are significant and asymmetric along two dimensions for each equity market pair, where downside risk spillovers are more severe and the degree of asymmetry by conditioning direction is rank ordered by relative equity market sizes. Aside from the US-CAN pair, downside and upside risk spillovers are significantly larger following the GFC as compared to the pre-crisis period. Observed asymmetric and time-varying behavior is consistent across high/low risk and high/low risk spillover sub-periods.

Market size and wages

This paper builds a simple three-country model with different market sizes and non-constant wages. We shed light on the evolution patterns of wages in middle-sized countries in the process of trade liberalization. We analytically disclose that, while the wage inequality between the large and the small countries first diverges and then converges in trade liberalization, the evolution patterns of wages in the middle-sized country are largely diversified, depending on the relative market sizes of countries.

One market, two perspectives, three implications: on the development of the special education market in Sweden

ABSTRACTThis study examines the development of the special education market through changes in demand and supply and discusses its implications on the system of education of students in need of special support informed by two theoretical perspectives. The study found out that the number of students and schools in the special education market has increased. The relative size of the special education market on the demand side has remained stable while an increase is observed on the supply side. The results also show that the private sector has grown relatively better than the public sector on both the demand and supply sides. Almost all the market segments have increased on both the demand and supply sides, especially the resource schools in the special education market segment. Based on these results, three implications are observed and discussed, namely a diverse and an extended special education system, increasing segregation within the special education system and a relative stability in the incidence of student exclusion.