Capacity Choice and Preemption of a Foreign Market

This paper studies the strategic role of foreign direct investment (FDI) in a framework with early-on capacity investments by a multinational enterprise (MNE) and relevant fixed costs. A three-stage game is considered : (i) MNE chooses internationalisation mode, and output to precommit by capacity investment ; (ii) local firm (HCF) decides about entry ; (iii) active firm(s) choose output. Cases exist in which MNE chooses FDI even if neither " exporting costs " nor firm-specific fixed costs are considered. Moreover, market preemption is not the only alternative justification for FDI. Credibility sometimes limits MNE’s strategic leadership ; this does not qualitatively affect the above results, but it is relevant.