This article establishes three stages game to discuss optimal entry modes for MNE while host country exist intermediate good market. The MNE can enter the host’s final good market through direct entry or mergers & acquisition. We find that if host country exist monopoly intermediate good market, the competition degree of final good market is greater when MNE chooses direct entry. But, at this time, the final good firm may face low intermediate good price. In the host country, the profit of the monopoly firm in intermediate good market and the consumer surplus will be high when the MNE chooses direct entry. But, the effect of different entry modes on the firm in final good market is uncertain. Given this conflict, the host country government must measure which entry mode of MNE can bring higher domestic welfare. We discovered that, at this time, the host country government will hope MNE choosing direct entry. However, the optimal entry mode for MNE is depend on the volume of fixed cost while MNE choose direct entry. The clash, between the MNE’s optimal choice and the host government’s expectation, forms the space which policy maker can intervene.
We also discuss the case, which the host country’s intermediate good market is free entry for firm. The result is almost the identical as before. The difference is that, at this condition, the intermediate good price in both entry modes is lower than that intermediate good market is monopoly. In addition, if intermediate good market is free entry, the host country’s government may hope MNE choosing M&A. Finally, we discovered that, if the production cost is similar between the MNE and the host firm in final good market, compare to intermediate good market is free entry, the MNE may prefer to choose M&A when the intermediate good market is monopoly.