Academic journal article Canadian Journal of Regional Science

On the Optimal Locational Policy for the Offshore Firm Entering a Foreign Market Area

Academic journal article Canadian Journal of Regional Science

On the Optimal Locational Policy for the Offshore Firm Entering a Foreign Market Area

Article excerpt

The optimal location of sales facility or branch factory of a firm entering a market area can be analyzed using a market-area based analytical method. Market boundary analysis shows (i) a new firm's sales facility is located at an appropriate distance from the existing firm, as determined by price level and freight rates; (ii) prices and freight rates, which are an existing firm's countervailing policies against entering firms, bestow important effects on price changes and negotiations. The shapes of market areas, market-area sizes, and sales amounts play decisive roles.

La localisation optimale d'une unite de vente ou de production suite a une decision de s'implanter sur le territoire d'un marche etranger peut etre analyse en utilisant une methode analytique basee sur l'analyse des zones de marche. Une analyse des limites des zones de marche demontre que (i) l'unite de vente d'une nouvelle compagnie devrait etre localisee a une distance appropriee de la compagnie existante, en fonction du niveau de prix et des couts de transport; (ii) les prix et les couts de transport, qui representent la politique de reponse d'une compagnie existane contre une nouvelle compagnie, comportent des effets importants sur les changements de prix et des negociations. La forme des zones de marche, leurs tailles et les volumes de ventes joue aussi des roles determinants.

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Many international economies have experienced trade liberalisation and reductions in trade barriers, for instance through the creation of such bodies as the European Union (EU) and the North American Free Trade Agreement (NAFTA). In this development, market areas have been enlarged beyond each nation's boundary. It can be expected that many firms would change their locational strategies in response to these new market areas. For instance, one firm may judge that it will be able to sell goods to a new market as a result of the expansion of its market area, and decide to export the goods by increasing production in its existing facilities. Another firm may build a new branch factory within a new market area to carry out its production and sales activities. Yet another firm may lose the benefit of maintaining its branch factory in the new market area, because of tariff reductions, and switch its production from a branch factory back to the main factory by shutting down the branch factory. (1) Thus, trade liberalisation may affect firms' production and sales activities, and their locational strategies, in many ways.

In order to study the locational changes of firms' production and sales facilities, motivated by changes in market areas, the analysis in this paper is based upon the premise that market area analysis provides some useful insights. The market boundary approach is effective in considering such questions as: If a firm builds a sales facility for the goods destined for a remote market,(2) where will the optimal location of its new sales facility be within the market area? Secondly, how would an existing firm respond to the new firm's entry into the market area? Our objective is to analyse specifically the consequences of price variation and negotiation.

In the literature on market boundary shape analysis, Launhardt (1885) pioneered the systematic study of the shapes of market boundaries. Launhardt showed that the shape of a market boundary is primarily determined by the firm's location, the price of goods and the freight rate. Many studies in the twentieth century generalised from Launhardt's work to generate more accurate and specific shapes for market boundaries. Parr's (1995) recent study focused on the detailed combination of firm's location, price of goods and freight rate, including exceptional point and linear markets. Furthermore, Rauch (1991) and Krugman (1996) have dealt with the problems of the effects of tariffs and trade barriers on the location of firms and cities. …

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