Uncertain Productivity Growth
3 THE OPTIMAL MARKET ENTRY MODE
VF - IF will always be steeper than the slope of VE - IE . As a result, the export value function
crosses the FDI value function always from above as depict in figure 3. In the underlying example,
an investor will serve the new foreign market through FDI if the prevailing productivity level is
larger than tfFc1 and for a productivity level between tfEc and ∣)Fc exporting turns out to be the
optimal market entry strategy. For the remaining productivity range, market entry implies losses
in both modes and is therefore discarded.
Figure 3: Investment Values within the Proximity-Concentration Trade-Off
A decisive aspect whether the FDI strategy dominates the export mode or vice versa depends on
the rank of the productivity cut-offs which result from equation (18) and (19) as
tfEc = rMr and '■ = ;I (20)
Figure 3 illustratively depicts a case in which the intersection between the two value functions
takes place above the horizontal-axes. However, for a cost structure with export fixed costs IE
close to FDI fixed costs, the two value functions may intersect on or below the horizontal axes.
In such a case, only the FDI strategy provides relevant zero or positive net present values and it
would represent the upper envelope function in figure 3. Simultaneously, its cut-off productivity
12