Playing Away to Win at Home: A Strategic Model of the Choice Between Exporting and Multinational Production with Cost-Reducing R&D Expenditures.

The strategic literature on the choice between exporting and multinational production has looked only at the interaction between either (i) a single potential multinational (based in country A) and a single (or set of) domestic firm(s) (based in country B) or (ii) two potential MNEs based in different countries (one in A and one in B). This paper departs from that structure to look at the interaction between two firms based in the same country, each of which faces the export, MNE choice concerning the servicing of a second country's market. Furthermore, firms have a choice over investment in a new technology which allows a corporate wide reduction in variable costs (eg cost reducing R&D). A two firm, leader-follower model is employed and it is found that under certain parameterisations we obtain a non-monotonic relationship between tariffs and multinationality. It is also possible that a firm will choose to be a multinational even though they would receive higher profits from the foreign market were they to export. They do so in order to deter their rivals from investing in the new, cost reducing technology.