A model of decentralized multinational investment in product development activities

Survey evidence gathered from American and Japanese sources supports the contention that firms invest in product development activities abroad to enhance their abilities to develop products to meet local needs. Differences in preferences across countries and informational asymmetries in observing local preferences provide a source of proximity advantage for multinational activity that has not been addressed previously in the literature. Using a model of duopoly competition with vertical product differentiation, foreign direct investment in product development is shown to be more likely, the larger the cost disadvantage implied by these informational asymmetries and, under certain restrictions, the larger the home market.