Uncertain Productivity Growth and the Choice between FDI and Export

4 TIMING & COMPARATIVE STATICS

entry time in the export mode is smaller (equal to, higher) than in the FDI mode.

It follows from equation (72) that

........    -‰ „

E(TE) Q E(TF) if -E Q 1                            (73)

^-F

which equals relation (66) and which is fulfilled, if

νθ
IE
If

Combining this result with the previous outcomes summarized in figure 7 it can be seen that for
all relative cost constellations above the diagonal line (area F₁ with -E > -F), the FDI mode’s
expected market entry time E(TF) is always less than in the export mode. Simultaneously,
FDI turns out to be the optimal entry strategy due to its higher option value. Inversely, for all
relative cost patterns below the diagonal line, the optimal FDI productivity cut-off strictly exceeds
the export cut-off. Therefore, if the new foreign market is served through exports, its expected
market entry will appear earlier with respect to the FDI mode. However, for all cost constellations
represented through the areas F1 and F2 , which are driven by α and σ, the FDI option value is
strictly superior to the export option value and consequently the investor is likely to serve the
market through FDI in E(TF,), which is strictly higher than E(TE), as illustrated by (73). Due
to the abolition of such a profitable export strategy for the sake of a more profitable future FDI
investment, a potential earlier expected market entry is prolonged by ∆E(T*) = E(TF) — E(TE).
Since the prolongation of the expected market entry is caused by the negligence of a less profitable
export mode over time, I refer to this first timing effect as prolongation of market entry time by
negligence.¹⁵

Result 4:

For IE < IF and w_Eτι > w_F with α > 0 and σ > 0, there exists a range of relative cost
constellations which leads to a prolongation of the expected market entry time by ∆E(T*) =
E(TF) — E(TE), due to the negligence of a profitable export mode in TE < TF.

¹⁵ This result is based on the assumption that the initial productivity level ⅛₀ is smaller than tfɪ with i = {E,F}.
For all cost constellations below the diagonal line in figure 7, the optimal market entry mode will also depend on
the current productivity level ⅛₀. If e.g. the current productivity level is above both cut-off productivity levels and
therefore enforcing FDI, there is no timing issue and no prolongation of entry time by negligence.

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