The Internationalization Process of Firms: from Exports to FDI
AbstractThis paper shows that uncertainty can lead firms to follow a gradual internationalization process. We describe a model in which firms are uncertain about their ability to earn profits in a foreign market and must decide whether or not to serve it, and whether to do so through exports or foreign affiliate sales. We show that a firm may first test the foreign market via exports, before engaging in foreign direct investment (FDI). To assess the evidence, we exploit a unique dataset of firm-level exports and FDI in individual destination countries, covering all Belgian companies over the 1998-2008 period. We show that a firm’s FDI entry in a foreign market is almost always preceded by its export entry. More uncertain foreign market conditions lead new exporters to delay FDI entry decisions. Our analysis suggests that exports and FDI, although substitutes from a static perspective, may be complements over time, since the knowledge acquired through export experimentation can lead firms to start investing abroad.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9332.
Date of creation: Feb 2013
Date of revision:
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Other versions of this item:
- Paola Conconi & André Sapir & Maurizio Zanardi, 2013. "The Internationalization Process of Firms: from Exports to FDI," Working Papers ECARES 2013/139596, ULB -- Universite Libre de Bruxelles.
- Paola Conconi & André Sapir & Maurizio Zanardi, 2010. "The internationalization process of firms : From exports to FDI ?," Working Paper Research 198, National Bank of Belgium.
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- F10 - International Economics - - Trade - - - General
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-13 (All new papers)
- NEP-BEC-2013-04-13 (Business Economics)
- NEP-CSE-2013-04-13 (Economics of Strategic Management)
- NEP-INT-2013-04-13 (International Trade)
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