Multinationals,Information Update,and Product Adaptation *

This paper develops a dynamic model of decision making by multinational firms. The firm chooses between exporting and producing abroad when it expands the market. Bayes learning is incorporated into this model in addition to fixed cost and transport cost Production in a foreign country gives the firm new information about the demand function. This information is applied to adjust the firm's expectation as well as output choice in the future. This process not only reduces the risk encountered by a firm in a foreign market, but also increases acceptance of the product which the firm manufactures. This paper concludes even if producing abroad loses money in the first period, the firm may still choose to set up plants in foreign countries rather than exporting, due to the dynamic information advantage associated with going multinational. F23,F21]