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Uncertain Productivity Growth and the Choice between FDI and Export

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Author Info
Erdal Yalcin ()

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Abstract

The underlying model analyzes the first time foreign market entry decision of a representative investor who can choose between export and FDI. The model combines the proximity-concentration trade-off framework with the real option methodology and sheds light on the effects of productivity growth. On the basis of a Geometric Brownian motion, three different productivity scenarios are considered (no growth, deterministic growth, uncertain growth) and opposed to each other. The introduction of productivity growth increases the likeliness of first time market entry through FDI. If the firm is confronted with uncertain productivity growth, market entry through FDI increases even further. Uncertainty is identified as a compounding force for the derived growth effects. The findings contribute to the static general equilibrium models which neglect intertemporal selection effects.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2773.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2773

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Related research
Keywords: export; FDI; uncertain productivity growth; real option approach;

Find related papers by JEL classification:
F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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