l o g o choosing global markets xiaomin wu and xiaopeng yin uibe, china

L o g o

Choosing Global Markets

Xiaomin Wu and Xiaopeng Yin

UIBE, China

www.themegallery.comwww.themegallery.com Company LogoCompany Logo

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Road Map

Introduction1

Literature Review2

Modeling and Results3

Concluding Remarks4


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1 、 Introduction

Motivation: A. Observation #1: trade volume/value ↑; & FDI by MNCs ↑ . →one thing connected above: FDI to build up a “export-

platform” or production base for MNCs→↑or ↓ trade. However, the change of production (i.e. Outsourcing) ≠ the

export market change.

Observation #2: Some foreign affiliates of MNCs (results of FDI) and the

headquarters of MNCs supply same market (e.g. Honda factory in Guangzhou & Japan supply the European market; etc.)

→ Where is the strategic choice for global market, and are final (export) markets?


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2. Main Literature Review (brief)

1.Hetrogeneity of firms is shown as the difference of productivities of firms currently. Their difference determines largely whether a firm can entry/stay in a market, and whether it can be an exporter (Melitz, 2003; Bernard, Eaton, Jensen & Kortum, 2005).

2. Not only every firm can export, but the hetrogeneity (shown as the level of productivity) will affect/determine the behavior of exporting for a firm (Helpman, Melitz 和 Yeaple; 2004 ）


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3. Among factors, entry cost and heterogeneity (Bernard & Jensen, 2001), or fixed cost of exporting and hetrogeneity (Helpman, Melitz & Yeaple; 2004), heterogeneityes for a firm’s decision of exporting

4. From (Melitz , 2003; Helpman, Melitz & Yeaple; 2004), the main conclusion is: lowest productivity firm will quit from the market, the high one will stay; the higher one will sell in the foreign market, the highest one will do FDI , rather than direct exporting.

5. Empirical evidence: for the data of foreign affiliates in China between 1998-2005, Higher productivity firm will export, and lower on will sell in the local market (Lu, Lu & Tao; 2010) (i.e. LLT model, hereafter).


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Where are final markets for MNCs, which establish foreign affiliates to produce their products?

focus

Are there any constraints/conditions to restrict/change the firm’s behavior for markets choosing?


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3. Model

Model——2×2×1 model (Melitz , 2003): Adopting LLT model (with no skilled labor

and no R&D, as Melitz , 2003) (1) 2 countries ： a developed country, say,

America (A), and a developing country, say, China (C)

（ 2 ） 2 sectors ： the large one produces homogenous good A, CTR; and the small one produces hoterogenous good Y, ITR, facing the monopolistic market

（ 3 ） 1 input ： general and homogenous labor


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3. Theoretical Model

Variables

（ 1 ） : consumption level on the heterogeneous good for Country i

（ 2 ） CES:

（ 3 ） : total consumption level for Country i ，（ 4 ） : price for the heterogeneous good for

Country i

（ 5 ） Variable cost per unit:

iy

1)1/(1

iEiP

/ic


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Model setting（ 6 ） For a firm: while entry the

heterogeneous good sector: facing a fixed cost to establishing the factory

（ 7 ） During the process of sale: if both production and sale have been completed within same country, the fixed cost for sale of the firm is: ; if both production and sale have been completed in two countries, the fixed cost for sale of the firm is

（ 8 ） Transportation cost: t

imf

sf

ss ff


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Model setting

Demand function for any heterogeneous good Y is:

10,)( 1

1

1

ii PEy


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Solving Model ∵ local price for good Y is:（ 1 ） Profit selling in Country A is: =（ 2 ） (Additional) Profit selling in

Country C is

=

AD

AD )(/)1( 1

sAm

AA ffcE

CX

CX )(/)1( 1

ssAC fftcE

/Acp


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Solving Model（ 3 ） When the firm does FDI: if the produce good

sell in Country C only, then the additional profit is:

=（ 4 ） When the firm does FDI: if the produce good

sell in Country A only, then the additional profit is:

=

CI

CI )(/)1( 1

sCm

CC ffcE

AI

AI )(/)1( 1

ssCm

CA ffftcE


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Solving Model

（ 3 ） When the firm does FDI: if the produce good sell in both Country A and C, the fixed cost to establish the foreign affiliates has been counted once. Then the additional profit is:

= + + =

ACI

ACI C

I AI C

mf )2(/)1( 11ss

Cm

ACC ffftEEc


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3. Theoretical Model Solving Model To simplify all function forms, let

， Then 5 functions above will be ：

（ 1 ），

（ 2 ），

11-1 , tTcC，

)()1(

sAmA

AAD ff

C

E

)()1(

ssA

C

CX ff

CT

E


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3. Theoretical Model Solving Model

（ 3 ）

（ 4 ）

（ 5 ）

)()1(

sCmC

CCI ff

C

E

)()1(

ssCmC

A

AI fff

CT

E

)2())(1(

ssCmC

AC

ACI fff

CT

EE


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3. Theoretical Model Additional Assumptions:（ 1 ）

（ 2 ）

AC CTC sAm ff s

Cm ff

sCm

Am fff ss

Cm

Am ffff

CA ETE /

C

AC

A

A

C

TEE

C

E /


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3. Theoretical Model Assumptions:（ 3 ）

Css

As

Am

E

ffT

E

ff )(

sCm

ssA

C

ff

ffT

C

C

)(

CCAA

CAA

Cm

s

CECE

TEEC

f

f

)(

A

C

ss

s

E

TE

ff

f


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3. Theoretical ModelLet F express vertical intercepts of

profit functions, thus

Let express slopes of profit functions, thus

ACI

AD

AI

CI

CX FFFFF

AD

ACI

AI

CI

CX


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3. Theoretical Model(1) Intersection of Profit & productivity is

(2) Intersection of Profit & productivity is

(3) Intersection of Profit & Profit is

AD 1

)1(

)(1

As

Am

A

E

ffC

CX 2

)1(

)(2

Css

A

E

ffTC

CX C

I 3

))(1(

)(3 CAC

sCm

CA

CTCE

ffCTC


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3. Theoretical Model(4) Intersection of Profit & Profit is

(5) Intersection of Profit & Profit is

< < < <

CI A

I4

)/)(1(4 CA

Cs

ETE

Cf

AI AC

I 5

C

Cs

E

Cf

)1(5

1 23

4 5


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4. Concluding Remarks Notes ： We use (4 choices) to indicate a American firm’s

strategic choices ： 1st item: if the firm produces and sell in the US: A; 2nd item: if the firm export (sell) to China: using C; if not,

using 0 ； 3rd item: if the firm does FDI in China: using C; if not, using

0 ； 4th item: For the case of FDI in China: if sell in China, using

C; if sell in the US, using A; if sell both in China and the US,

using AC

From assumptions from Melitz model (Melitz, 2003; Helpman, Melitz, &Yeaple, 2004) ， the direct exporting and FDI should be not occur simultaneously. So if the 2nd item is C, the 4th item should be 0.

(.,.,.,.) (.,.,.,.) (.,.,.,.)


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4. Concluding Remarks

Finding 1 ：When the productivity increases, the

firm will serve both domestic and foreign markets. And the higher productivity is, the more incentive to serve the foreign market. The existing conclusions from Melitz (2003) and Helpman, Melitz, &Yeaple (2004) and others held here.


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Finding 2 ， When the firm choose

to FDI due to its high productivity, if there is any other constraint such as production capacity constraint or financial constraint, the firm optimal choice for global marketing will be shown according to its productivity order (from high to low):

),,,( ACCOA

),,,( CCOA

),,,( OOCA

),,,( OOOA


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4. Concluding Remarks Finding 3 ， When the firm choose

to FDI due to its high productivity, if there is no any other constraint, the firm optimal choice for global marketing will be shown according to its productivity order (from high to low):

This can explain both facts observed by Melitz etc, and LLT, without introducing R&D and intermediate goods.

),,,( ACOA

),,,( CCOA

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