Multinational plant location as a game of timing

We study the problem of when firms should switch from exporting to producing at an onshore plant which will cater to a local market. The model incorporates factors such as rivalry, differences between costs of domestic and offshore production, differences in consumer preferences for offshore and domestically produced goods, and the capital costs associated with switching to domestic production. We find equilibrium timing patterns where there is a leader and a follower (diffusion equilibria) to be most typical. Furthermore, we find that a firm with lower switching costs has a competitive advantage in the determination of which firm will lead. It is found in the duopoly model that market growth and production and transportation unit costs have a relatively greater impact on the timing of the switch than do changes in demand elasticities or changes in the fixed costs of switching. With more firms and increased competition, however, the effect of changes in fixed costs become relatively greater.