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Foreign Direct Investment and Exports with Growing Demand

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  • Rafael Rob

    ()
    (Department of Economics, University of Pennsylvania)

  • Nikolaos Vettas

    ()
    (Department of Economics, University of Athens)

Abstract

We explore entry into a foreign market with uncertain demand growth. A multinational can serve the foreign demand by two modes, or by a combination thereof: it can export its products, or it can create productive capacity via Foreign Direct Investment. The advantage of FDI is that it allows for lower marginal cost than exporting does. The disadvantage is that FDI is irreversible and, hence, entails the risk of creating underutilized capacity in the case that the market turns out to be small. The presence of demand uncertainty and irreversibility gives rise to an interior solution, where the multinational, under certain conditions, both exports its products and does FDI.

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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 03-001.

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Length: 56 pages
Date of creation: 13 Jan 2003
Date of revision:
Handle: RePEc:pen:papers:03-001

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Keywords: Foreign Direct Investment; Entry; Exports; New Markets;

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References

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