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Switching between Domestic Market Activity, Export and FDI

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Author Info

  • Hiller, Sanne

    ()
    (Department of Economics, Aarhus School of Business)

  • Yalcin, Erdal

    ()
    (Eberhard Karls University)

Abstract

Do rms maintain their chosen market serving mode over time if they are confronted with dynamic processes such as uncertain productivity? What are the determinants for switching between market serving modes over time? Within a partial equilib- rium model which combines the proximity-concentration trade-o with a stochastic productivity evolution, we analyze the transition dynamics between domestic market serving, exporting and FDI. We nd that a stochastic productivity development gen- erates hysteresis, and thereby con rm a general real option result. Market serving mode switching is driven by country speci c competition, irreversible xed costs, pro- ductivity growth and volatility. Higher xed costs and volatility increase the likeliness of serving mode continuity whereas a higher degree of competition and productivity growth raise the probability of serving mode switching.

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Bibliographic Info

Paper provided by University of Aarhus, Aarhus School of Business, Department of Economics in its series Working Papers with number 09-13.

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Length: 49 pages
Date of creation: 01 Aug 2009
Date of revision:
Handle: RePEc:hhs:aareco:2009_013

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Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark
Phone: +45 89 486396
Fax: +45 8615 5175
Web page: http://www.asb.dk/departments/nat.aspx
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Keywords: Export; FDI; Market Serving Strategy; Real Option;

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