EXPLORING NEW MARKETS - DIRECT-INVESTMENT, CONTRACTUAL RELATIONS AND THE MULTINATIONAL-ENTERPRISE

We consider the multinational firm's decision on whether to enter a ne w market immediately via direct investment or to contract initially wi th a local agent and (possibly) invest later. Use of a local agent all ows the multinational to avoid costly mistakes by finding out if the m arket is large enough to support direct investment However, the agent is able to extract information rents from the multinational due to bei ng better informed about market characteristics. We find that direct i nvestment is the desirable mode of entry when the market is on average large and the variability in profits is not.