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UBC Theses and Dissertations

Essays on foreign direct investment and entry behaviour Takechi, Kazutaka

Abstract

This thesis consists of three essays that contribute to international trade and industrial organization. The first essay investigates the extent to which R&D expenditure differences are caused by different foreign expansion decisions, namely export and Direct Investment Abroad (DIA). We adopt an international oligopoly specification that takes into account the effects of competitors' foreign expansion strategy on R&D, in which the R&D decision is endogenized. Then, this paper uses a panel data set of Japanese electronics firms to study not only the effect of own DIA but also that of other firms' DIA on own R&D. We find that the endogenous R&D model is supported by the empirical evidence. Our data support the predictions of the model associated with the level of technology transfer costs, which suggest that transfer costs are high for Asian and low for North American countries. The second essay examines whether direct investment in distribution leads to manufacturing direct investment. The primary purpose of direct investment in distribution is to promote exports. However, by engaging in economic activities, multinational firms can learn about local markets. This might increase benefits from manufacturing direct investment. By using data on Japanese electronics firms, we find that there exists a learning effect of distribution direct investment in Asia. In other words, distribution direct investment increases the probability of manufacturing investment. This suggests that distribution affiliates are important in learning about local markets prior to setting up manufacturing affiliates due to the high uncertainty of Asian markets. The third essay investigates the credibility of an incumbent introducing a new product for entry deterrence in a vertically differentiated good model. We show that if market size and quality dispersion are extremely large or small, such behaviour is not credible. Entry is either accommodated or blockaded depending only on entry costs. However, if market size and quality dispersion are intermediate, new good production can be a credible threat, since the effect of expanding the market share dominates the price competition effect. In this case, prohibition of new product introduction improves welfare.

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