Foreign market entry strategies under asymmetric information

A home firm signals her private cost information by expanding in a foreign firm’s country. Credible signalling to deter counter-entry may occur through a direct investment (but not through exports) and may even entail entering an unprofitable market. While this produces social benefits, uninformative signalling may be welfare-reducing. Hence, we argue that moderate to high location costs may be socially desirable. We also show that there are not simple monotonic relationships between technology/demand conditions and firms’ entry modes. Thus, the signalling explanation of international expansion makes it possible to motivate some controversial empirical findings on a theoretical ground