The internationalization process of firms : From exports to FDI ?
AbstractWe describe a simple model in which domestic firms decide whether to serve a foreign market through exports or horizontal foreign direct investment (FDI). This choice involves a trade-off between the higher variable trade costs associated with exports and the higher fixed set-up costs associated with establishing foreign subsidiaries. Crucially, firms are uncertain about their profitability in foreign markets and can only learn it by operating there. To obtain market-specific knowledge, firms may follow an “internationalization process”, serving the foreign market via exports first and eventually, in some cases, switching to local subsidiary sales. To assess the validity of the predictions of our model, we use firm-level data on export and FDI decisions in individual destination markets for all companies registered in Belgium over the period 1997-2008. We show that firms’ strategies to serve foreign markets depend not only on the variable and fixed costs associated with exports and FDI, but also on the export experience they have acquired in that market.
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Bibliographic InfoPaper provided by National Bank of Belgium in its series Working Paper Research with number 198.
Length: 45 pages
Date of creation: Oct 2010
Date of revision:
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Exports; FDI; Uncertainty; Experimentation;
Other versions of this item:
- Conconi, Paola & Sapir, André & Zanardi, Maurizio, 2013. "The Internationalization Process of Firms: from Exports to FDI," CEPR Discussion Papers 9332, C.E.P.R. Discussion Papers.
- 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.
- F10 - International Economics - - Trade - - - General
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-30 (All new papers)
- NEP-CSE-2010-10-30 (Economics of Strategic Management)
- NEP-IFN-2010-10-30 (International Finance)
- NEP-INT-2010-10-30 (International Trade)
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