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Foreign Direct Investment and Exports with Growing Demand

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  • Rafael Rob
  • Nikolaos Vettas
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    Abstract

    We explore entry into a foreign market with uncertain demand growth. A multinational can serve the foreign demand by two modes, or by a combination thereof: it can export its products, or it can create productive capacity via foreign direct investment (FDI). The advantage of FDI is that it allows for lower marginal cost than exporting does. The disadvantage is that FDI is irreversible and, hence, entails the risk of creating under-utilized capacity in the case that the market turns out to be small. The presence of demand uncertainty and irreversibility gives rise to an interior solution, where the multinational, under certain conditions, both exports its products and does FDI. Copyright 2003, Wiley-Blackwell.

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    Bibliographic Info

    Article provided by Oxford University Press in its journal The Review of Economic Studies.

    Volume (Year): 70 (2003)
    Issue (Month): 3 ()
    Pages: 629-648

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    Handle: RePEc:oup:restud:v:70:y:2003:i:3:p:629-648

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    Cited by:
    1. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, American Economic Association, vol. 94(1), pages 300-316, March.
    2. Yalcin, Erdal & Sala, Davide, 2012. "Uncertain productivity growth and the choice between FDI and export," Discussion Papers of Business and Economics, Department of Business and Economics, University of Southern Denmark 19/2012, Department of Business and Economics, University of Southern Denmark.
    3. Kozo Kiyota & Shujiro Urata, 2007. "The Role of Multinational Firms in International Trade: The Case of Japan," Working Papers, Research Seminar in International Economics, University of Michigan 560, Research Seminar in International Economics, University of Michigan.
    4. Gao, Lan & Liu, Xiaohui & Zou, Huan, 2013. "The role of human mobility in promoting Chinese outward FDI: A neglected factor?," International Business Review, Elsevier, Elsevier, vol. 22(2), pages 437-449.
    5. Blum, Bernardo S. & Claro, Sebastian & Horstmann, Ignatius J., 2013. "Occasional and perennial exporters," Journal of International Economics, Elsevier, Elsevier, vol. 90(1), pages 65-74.
    6. Guy Meunier & Jean-Pierre Ponssard & Catherine Thomas, 2013. "Capacity Investment under Demand Uncertainty: The Role of Imports in the U.S. Cement Industry," Working Papers, HAL hal-00816410, HAL.
    7. Arunish Chawla, 2008. "Multinational Firms, Monopolistic Competition and Foreign Investment Uncertainty," CEP Discussion Papers, Centre for Economic Performance, LSE dp0866, Centre for Economic Performance, LSE.
    8. Arunish Chawla, 2008. "Multinational firms, monopolistic competition and foreign investment uncertainty," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 19592, London School of Economics and Political Science, LSE Library.
    9. Daniel LĂ©onard & Ngo Van Long, 2012. "Technology Transfers and Industry Closures," CIRANO Working Papers, CIRANO 2012s-27, CIRANO.
    10. Beladi, Hamid & Mukherjee, Arijit, 2012. "Market structure and strategic bi-sourcing," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 82(1), pages 210-219.
    11. Yang, Yong & Mallick, Sushanta, 2014. "Explaining cross-country differences in exporting performance: The role of country-level macroeconomic environment," International Business Review, Elsevier, Elsevier, vol. 23(1), pages 246-259.

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