Uncertain Productivity Growth and the Choice between FDI and Export

Uncertain Productivity Growth
investments are postponed. A graphical illustration visualizes the different adjustments very

clearly. The two continuous curves in figure 5 represent the net present investment values for
both market entry strategies in the presence of productivity growth, whereas the dashed lines
represent the corresponding option values. If the investor decides on the market entry problem
by applying the Marshallian rule, the optimal investment strategy is derived in the same manner
as in a scenario without growth. In such a case for current productivity levels higher than tf⁰F,
FDI represents the optimal mode. Exporting is chosen for current productivity levels between
V⁰E and V⁰F. These cut-offs are all lower than those in scenario one as explained and would
cause an earlier market entry in both strategies. However, for the determination of the optimal
productivity cut-offs the investor additionally accounts for the option values as there is a timing
problem. In contrast to scenario one, these optimal cut-offs result at the tangency point between
the net present investment value function and the respective option value. At these points for each
market entry mode, the net investment value equals its option value, respectively, and the investor
does no longer postpone his investment decision. Rearranging the earlier derived Jorgensonian

Figure 5: Value Functions of Exporting and FDI

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