Uncertain Productivity Growth and the Choice between FDI and Export

4 TIMING & COMPARATIVE STATICS

modes additionally depend on the respective variable and fixed costs, the extent of their expected
market entry time adjustments differs due to different cost structures. An increase in σ leads e.g.
to a stronger rise in the FDI mode’s expected market entry time

∂E(TF) > ∂E(TE) > 0
∂σ ∂σ

if

IE    IF

Me  Mf ^,

which is the case for all relative cost patterns below the diagonal line in figure 7. Figure 8
represents such a relative cost constellation where panel b) differs from panel a) only in σ . As a
result of the uncertainty increase, the expected market entry time is prolonged in both modes.
However, the change in the FDI mode turns out to be higher than in the export mode with

∆E(TF) > ∆E(TE).

Finally, three crucial effects can be identified within the proximity-concentration trade-off frame-
work, associated with an increase in σ :

• An increase in the expected market entry times in both modes.

• An increase in the range of relative cost constellations in figure 7 favoring FDI as the optimal
market entry mode.

• A higher increase in the expected market entry time in the FDI mode.

As a consequence, market entry through FDI becomes more likely, but the likeliness of market
entry per period decreases due to postponement.

Result 5:

For IE < IF and w_Eτ 1 > wF with κ = 1, a rise in productivity volatility σ increases the likelihood
of first time market entry through FDI but prolongs the expected market entry time E(TF). The
probability of first time market entry in T decreases.

These comparative static findings are compliant with the general real option literature according
to which uncertainty monotonically increases the market entry time (Dixit and Pindyck, 1994).

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