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Uncertain Productivity Growth and the Choice between FDI and Export

Authors


  • We are grateful for CESifo's financial sponsorship. Erdal Yalcin Thanks Aarhus University for hosting him while working on this model.

Abstract

While determinants of FDI patterns have received widespread attention, the timing of their surge remains largely unexplained. According to the proximity–concentration trade-off argument, a surge in FDI in times of decaying international transportation costs seemingly represents a paradox. Besides transportation costs, other factors have contextually changed: in particular, the uncertainty that firms bear has increased. Enriching the classical choice problem of a multinational firm with insights from the literature on investment under uncertainty, we illustrate how different types of uncertainty determine the timing and optimal entry mode (i.e. FDI or export) of a multinational enterprise into a new market.

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