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Multinationals' Mode of Entry in the Presence of Upstream Spillovers

By RAGNHILD BALSVIK

Abstract

Multinationals' mode of foreign expansion may depend on their expectations of spillovers. I consider a monopolist with a vertical production structure where outsourcing of intermediates to a host country firm is one of three possible entry modes. Spillovers generate threat of entry of a new input producer. With incomplete outsourcing contracts that result in the two firms bargaining over how to share the potential surplus, upstream spillovers do not necessarily benefit the downstream multinational. If the multinational instead allows the supplier to set the price of intermediates (successive monopoly), it clearly benefits from upstream spillovers. Copyright (c) The London School of Economics and Political Science 2009.

DOI identifier: 10.1111/j.1468-0335.2008.00771.x
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