Uncertain Productivity Growth
net present value function would represent the upper envelope in figure 3 and the investor serves
the market through a foreign plant, conditional on a positive net present value. Any relative cost
constellation below the diagonal curve in figure 4 leads to a cut-off rank with iïEc always lower
than iïFc which would be represented by an upper envelope function in figure 3 consisting of both,
the FDI and export mode’s net present value functions. Therefore, in such a case the optimal
market entry strategy depends on the current observed productivity state iï and can be either
FDI or exporting. The investor will choose the export mode if the observed current productivity
level iï lies in-between the two productivity cut-offs iïEc,iïFc1 and fulfills the following condition
3 THE OPTIMAL MARKET ENTRY MODE
■ >iï>κ ( M≡⅛ )r >iïEc. (22)
An essential result in the underlying scenario with no growth and no uncertainty is that 50% of
all possible relative cost structures (upper left corner in figure 4) unambiguously entail FDI as
the optimal market entry strategy, conditional on positive net present values. Furthermore, the
export mode never becomes a unique dominant strategy as the lower left corner in figure 4 can
lead to both export and FDI.
Result 1:
Given IE < IF and wF < wEτθ, for more than 50% of all possible relative cost constellations
within the proximity-concentration trade-off framework, FDI represents the unique optimal mar-
ket entry mode.
The upper horizontal margin in figure 4 typifies relative cost constellation for which the fixed
costs in both market entry modes are equal, but the variable costs are always lower in the FDI
mode. Therefore, the investor will always opt for FDI. Analogously, for all cost constellations
positioned on the right vertical margin in figure 4 both market entry modes exhibit equal total
variable costs. Due to the lower fixed costs in the export strategy, in such cases the investor will
always enter the market as exporter. Finally, the upper right corner in figure 4 represents a cost
constellation for which the fixed cost advantage of the FDI mode is equal to the variable cost
advantage of the export mode and therefore, the investor is indifferent between the two market
entry strategies.
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