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location. Uncertainty and asset specificity with, say, a foreign distributor, would compel the firm to take things in its own hands and invest in the foreign location in order to make sure that the goods or services reach the buyer in the appropriate way and at a reasonable cost.

Horizontal expansion

Horizontal expansion occurs when the firm sets up a plant or service delivery facility in a foreign location with the goal of selling in that market, and without abandoning production of the good or service in the home country. The decision to engage in horizontal expansion is driven by forces different than those for vertical expansion. Production of a good or service in a foreign market is desirable in the presence of protectionist barriers, high transportation costs, unfavorable currency exchange rate shifts, or requirements for local adaptation to the peculiarities of local demand that make exporting from the home country unfeasible or unprofitable. Like in the case of vertical expansion, these obstacles are merely a necessary condition for horizontal expansion, but not a sufficient one. The firm should ponder the relative merits of licensing a local producer in the foreign market or establishing an alliance against those of committing to a foreign investment. The sufficient condition for setting up a proprietary plant or service facility has to do with the possession of intangible assets—brands, technology, know-how, and other firm-specific skills—that make licensing a risky option because the licensee might appropriate, damage or otherwise misuse the firm’s assets.2

2 For a summary of the basic economic model of the multinational firm, see Caves (1996). Stephen Hymer [1960] was the first to observe that firms expand horizontally to protect (and monopolize) their intangible assets.

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