Theoretical and experimental insights on firms’ internationalization decisions under uncertainty
AbstractWe revisit and extend previous theoretical work on internationalization decisions by firms which are imperfectly informed on the state of the demand in the market into which they are planning to export or enter through foreign direct investment (FDI). The latter is a costly strategy mitigating the international firm's demand uncertainty, while the local firm is perfectly informed. We report results from an experimental test of the aforementioned framework which confirm dominant strategy play by local firms under both the good and bad states of the local demand. Also, the prediction that the magnitude of the FDI-specific cost determines whether foreign firms enter via FDI is confirmed in qualitative terms. However, in the case in which FDI is the dominant strategy under risk neutrality, less than full FDI adoption is obtained. We also find an unexpected interaction between the internationalization decision and the market strategy once entry has occurred, indicating the presence of relevant behavioral and strategic factors which are not anticipated by the theoretical model.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2012041.
Date of creation: 22 Nov 2012
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mode of entry; risk and uncertainty; experiment;
Find related papers by JEL classification:
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
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