Uncertain Productivity Growth
3 THE OPTIMAL MARKET ENTRY MODE
investment modes’ option values behave for different cost-constellations. It can be shown that
FE Q1
Ff >
if
wF
1
WET θ
νθ
1-νθ
Ie ( IE V '
If Vf /
(38)
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 Ff(tf)
which is always bigger than the export option value Fe(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.
20
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