Multinationals’ mode of entry with presence of vertical spillovers

Abstract

Multinationals’ mode of foreign expansion may depend on whether or not they expect technological externalities or spillovers to generate new competition. Existing models where ex-post spillovers affect the ex-ante entry choice usually study the choice between exporting and FDI with horizontal spillovers. I consider a monopoly firm with a vertical production structure that has four possible modes of entry, one of which includes outsourcing of intermediate input production to a host county firm. Technological spillovers in this model are vertical, generating threat of entry of a new intermediate input producer. When outsourcing contracts are incomplete, vertical spillovers that generate threat of entry upstream do not necessarily benefit the multinational in the downstream market.