Uncertain Productivity Growth and the Choice between FDI and Export



Uncertain Productivity Growth

4 TIMING & COMPARATIVE STATICS


By integrating the probability density function (69) it is possible to derive the corresponding
cumulative distribution functions as

G(T*,⅞A*) = N


+ (α


1 σ2)T*


+e



1 σ2)t


(74)

with ⅛ << and i {E,F}.

* *■*

Expected Market Entry Time Te, Tf

(a) ¾ < ⅛F, α = 0.04,⅛0 = 1= 0.1, but
FF (ð) > FE (ð) with κ = 1


(b) ¾ < ⅛F, α = 0.04,⅛0 = 1= 0.16, but

FF (tf) FE (tf) with κ = 1

Figure 8: Cumulative Distribution Functions of Ti*.


Panel a) in figure 8 represents the cumulative distribution functions of both investment strategies
for a relative cost constellation which leads to a productivity cut-off ranking with
tf*E < &р. The
vertical dashed line represents the export mode’s expected market entry time and the s-shaped
curve its cumulative distribution function. The continuous curves represent the FDI mode. In
the underlying example the export mode exhibits a first-order stochastic dominance over the FDI
strategy. Differently expressed, for any market entry time Ti* , the probability of market entry
through exports will always be higher than in the FDI case. However, for the chosen relative cost
pattern, the FDI mode exhibits a higher option value (see figure 7, areas F
2 , F3) and therefore

32



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