This paper develops a model with distribution costs to study firm cooperation in forming strategic alliances and mergers, under different types of foreign market entry modes, that is, export or foreign direct investment (FDI). Under both export and FDI, we find that cross-border alliances (mergers) dominate domestic alliances (mergers); and cross-border alliances and mergers are preferred to independence if and only if distribution cost is high. Under export, cross-border alliances are chosen in equilibrium if distribution cost is high. Under FDI and with high distribution cost, cross-border alliances (mergers) are chosen in equilibrium if plant setup cost is low (high).
Bibliographical noteAlso presented at PekingUniversity, Zhongshan University, National Taiwan University, National University of Singapore, European Trade StudyGroups, a workshop at University of New South Wales, and Asia-Pacific Trade Seminars.
Qiu acknowledges the CWE of Tsinghua University (China) and RIEB of Kobe University (Japan) for their hospitality and financial support for his academic visits, during which a part of this paper was written, and the Research Grants Council of Hong Kong’s (HKUST6428/05H) financial support.
- Cross-border strategic alliances
- Cross-border mergers
- Distribution costs