L o g o Choosing Global Markets Xiaomin Wu and Xiaopeng Yin UIBE, China

L o g o Company Logo Road Map Introduction 1 Literature Review 2 Modeling and Results 3 Concluding Remarks 4

L o g o Company Logo 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?

L o g o Company Logo 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 ）

L o g o Company Logo 2. Main Literature Review (brief)  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 , Higher productivity firm will export, and lower on will sell in the local market (Lu, Lu & Tao; 2010) (i.e. LLT model, hereafter).

L o g o Company Logo 2. Main Literature Review (brief) Where are final markets for MNCs, which establish foreign affiliates to produce their products? focus Are there any constraints/co nditions to restrict/change the firm’s behavior for markets choosing?

L o g o Company Logo 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

L o g o Company Logo 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:

L o g o Company Logo 3. Theoretical Model  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

L o g o Company Logo 3. Theoretical Model  Model setting Demand function for any heterogeneous good Y is:

L o g o Company Logo 3. Theoretical Model  Solving Model  ∵ local price for good Y is: （ 1 ） Profit selling in Country A is: = （ 2 ） (Additional) Profit selling in Country C is =

L o g o Company Logo 3. Theoretical Model  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: =

L o g o Company Logo 3. Theoretical Model  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: = + + =

L o g o Company Logo 3. Theoretical Model  Solving Model To simplify all function forms, let ， Then 5 functions above will be ： （ 1 ） ， （ 2 ） ，

L o g o Company Logo 3. Theoretical Model  Solving Model （ 3 ） （ 4 ） （ 5 ）

L o g o Company Logo 3. Theoretical Model  Additional Assumptions: （ 1 ） （ 2 ）

L o g o Company Logo 3. Theoretical Model  Assumptions: （ 3 ）

L o g o Company Logo 3. Theoretical Model  Let F express vertical intercepts of profit functions, thus  Let express slopes of profit functions, thus

L o g o Company Logo 3. Theoretical Model (1) Intersection of Profit & productivity is  (2) Intersection of Profit & productivity is  (3) Intersection of Profit & Profit is

L o g o Company Logo 3. Theoretical Model  (4) Intersection of Profit & Profit is  (5) Intersection of Profit & Profit is < < < <

L o g o Company Logo 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.

L o g o Company Logo 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.

L o g o Company Logo  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):

L o g o Company Logo 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.

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