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Switching between Domestic Market Activity, Export and FDI

Author

Listed:
  • 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.

Suggested Citation

  • Hiller, Sanne & Yalcin, Erdal, 2009. "Switching between Domestic Market Activity, Export and FDI," Working Papers 09-13, University of Aarhus, Aarhus School of Business, Department of Economics.
    • Handle: RePEc:hhs:aareco:2009_013
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    More about this item

    Keywords

    Export; FDI; Market Serving Strategy; Real Option;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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