On the vertical internationalisation of portuguese firms

In this paper the conditions under which a manufacturing firm will have an incentive to integrate activities of distribution and product development of its products in a foreign market are examined. The incentive to set subsidiaries instead of dealing with independent product development firms depends on the elimination of the double mark-up on two grounds. Elimination of the intermediate mark-up, expands output and profits. On the other hand, the expansion of output allows a better adjustment of product to the specific needs of foreign consumers in the case of medium sized firms because it enables them to break the fixed cost of product development through a large number of sold units. As multinationalisation brings co-ordination costs that increase with the "corrununication distance" between domestic and foreign markets and the incentive to expand vertically abroad is an increasing function of firm size, subsidiaries will be established more likely in countries which are neighbours or linguistic alike to the home country.