Uncertain Productivity Growth and the Choice between FDI and Export

Uncertain Productivity Growth

level ^Fc will be always equal to or below ^r∂*E_c. Consequently, for such cost constellations FDI
represents the only and optimal market entry strategy conditional on positive net present values.
It is possible to derive a concise condition which describes the ordinal rank between the two
productivity cut-offs. It can be shown that

Within the assumed relative cost structure, relation (21) states that the export mode’s produc-
tivity cut-off ^Ec is smaller (equal, bigger) than the FDI productivity cut-off tf*F_c if its fixed cost
advantage is bigger (equal, smaller) than the FDI mode’s variable cost advantage. Since within

Figure 4: Relative Cost Constellations within the Proximity-Concentration Trade-Off

the proximity-concentration trade-off framework relative fixed costs IE and relative variable costs
νθ

)1-νθ

never exceed unity, it is possible to depict all relevant cost patterns in a unit rel-

ative cost box. The diagonal curve in Figure 4 represents all relative cost constellations for the

FDI and export mode which exhibit a comparative fixed cost advantage equal to the compara-
tive variable cost advantage, given the technology concavity θ and the country specific degree of
competition ν . Therefore, any relative cost structure on or above the diagonal line leads to a
FDI productivity cut-off ∣)ⁱF_c being equal to or bigger than ∣)ⁱE_c. In both cases the FDI mode’s

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