Uncertain Productivity Growth and the Choice between FDI and Export

Uncertain Productivity Growth

fixed cost and marginal cost advantage with

if

Therefore, for all relative cost constellations in figure 7, which are above the dotted line, the

Figure 7: Relative Cost Constellations & Uncertain Productivity Growth

cut-off level for the FDI mode will always be lower than the export threshold. The opposite holds
for cost patterns below the diagonal curve. The intuition behind this result is that uncertainty
influences both entry cut-offs proportionally and does not distort the relationship which has been
derived in the deterministic case. However, for the final entry decision it is the option values
which determine the optimal market entry mode for given cost constellations.

It is possible to describe the relationship between the two option value functions by

I Ie

Vf

which is equal to the relationship in the previous scenario except the exponent βu which is risk
sensitive. According to the fundamental equation (63) for σ = 0

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