Working Papers,
Copenhagen Business School, Department of International Economics and Management

Abstract: One of the important strategic decisions of TNCs in entering emerging markets is product differentiation in relation to growth in incomes and type of competition expected from local firms. This paper develops a simple theory in the context of the Indian economy that has opened up recently to competition. Being protected from potential competition in the pre-reform era, local incumbents do not have the usual incumbency advantages. Saddled with sunk costs in sub-international product lines, they cannot price-compete if new entrant TNCs position their product qualities sufficiently high. This and the fact that income growth swells the income of the middle classes are used to generate two hypotheses: 1. New entrant TNCs enjoy higher income elasticity for their products. 2. They face price elasticity similar to locals' unless there are too many TNCs competing in the same generic market. The hypotheses are tested on the basis of firm level panel data for five consumer durable goods industries.

Keywords: Transnational corporations; Market entry; Emerging markets; Product differentiation; Growth; India; Open economies

17 pages, June 10, 2001

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