Uncertain Productivity Growth and the Choice between FDI and Export

Uncertain Productivity Growth

investment modes’ option values behave for different cost-constellations. It can be shown that

with βc = r.
α

Figure 6: Relative Cost Constellations and Productivity Growth

Relation (38) is almost equal to the first condition in relation (37) except the second term on the
right hand side which depends on the growth rate α. Therefore, it can be drawn as dashed line in
the previous relative unit cost box. Within the proximity-concentration trade-off framework, for
all relative cost constellations on the dash line, the two market entry strategies’ option functions
coincide. Respectively, any cost structure above the line will exhibit a FDI option value F_f(tf)
which is always bigger than the export option value F_e(tf). The opposite holds for cost constel-
lations below the dashed line. Based on the two conditions (37) and (38) it is possible to derive
the optimal market entry modes for different cost constellations presented in figure 6.

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