Academic journal article Management International Review

The Effect of Internationalization Mode on Product Prices: A Market Test

Academic journal article Management International Review

The Effect of Internationalization Mode on Product Prices: A Market Test

Article excerpt

Introduction

This paper investigates an important question in international business (IB): Do buyers pay different prices for "identical" products made by the same MNE when varying only the mode of serving a foreign market: through exports, a wholly owned subsidiary (WOS), a joint venture (JV), or a licensing agreement?(1) The paper also looks at how factors such as branding and purchase risk influence these price differentials. This work has important implications for managers of MNEs when they choose the mode by which to serve international markets.

To date, although the issue of mode effect on product price is well established in the theoretical literature, it has not been addressed empirically in the literature on lB and MNEs (Rugman/Lecraw/Booth 1985, Buckley/Casson 1981). In empirical studies on the determinants and effects of mode servicing choices in international markets, the focus has been on the relative costs of each mode: tariff and nontariff barriers to trade and transactions costs. Of more than one hundred empirical studies on location decisions and mode effects cited in a recent comprehensive review (Dunning 1993), none tested the effects of different market servicing modes on product prices. Yet, the relative profitability of the different modes of servicing a market may depend on price as well as on cost factors.

The current analysis introduces mode effects as an independent variable, comparing the prices of imported MNE products to the prices of locally manufactured versions of "identical" products produced by the same MNE or its licensee. Local manufacture is further distinguished according to mode: licensing, JV, or WOS.

Literature Review: Theories of International Business

An MNE usually has a choice in how it services a foreign market via different modes of production: through exporting, licensing, joint ventures, or wholly-owned subsidiaries. This is an important international business decision that has been extensively analysed in the theoretical and empirical literature on MNEs and the internationalization of the firm.

Research in international business on production mode choice (e.g., Dunning 1980, Gatignon/Anderson 1988, Cantwell 1991, Dunning 1993) has usually focused on the relative costs of various modes of serving a market - transaction costs, production costs, transportation costs, and tariff costs - as determinants of the choice of location and mode of operations. Although the theoretical literature has long recognized the importance of the prices and revenues on mode choice, the empirical literature has largely neglected these important topics.(2) Most often in empirical research, revenues have been assumed as a constant across the modes, with the focus of the analysis on variables relating to the cost side. However, as Grosse (1985) pointed out in a theoretical paper, important strategic decisions in international business, such as the mode choice for the internationalization process, should incorporate the potential revenue as well as potential cost effects of mode choice.

This section of the paper analyses the impact of different foreign market servicing modes on revenue, by looking at how price premiums (or discounts) of products vary across the different modes. It makes a contribution to the economics-based research literature on international business by focusing on the "demand side" (i.e., the revenue side) of the mode choice decision. In the review of the literature that follows, the export mode of servicing a market will be used as a reference point due to the manner in which the data were gathered (See further below).

Mode Effects

Often markets abroad, especially in developing countries, are protected from imports by tariff and nontariff barriers to trade to protect domestic industries. This protection allows firms producing inside these markets to sell their products at prices above those prevailing in the international market and/or to sell products with lower quality at similar prices. …

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