Uncertain Productivity Growth and the Choice between FDI and Export

Uncertain Productivity Growth

Figure 9: Expected Market Entry Time Pattern

low growth rates tend to dislike uncertainty and postpone their investment decision further into
the future the higher the volatility.

Finally, within the proximity-concentration trade-off framework, a reduction of the expected
market entry time due to an increase in σ is still accompanied by a rise in the range of relative
cost constellations in figure 7 which enforce FDI as the optimal entry strategy. Additionally, one
can conclude that for a firm associated with a high productivity growth rate, a rise in uncertainty
may lead to an earlier market entry.

Result 6:

For IE < IF and wEτ 1 > wF with κ > 1, a rise in productivity volatility σ increases the likelihood
of first time market entry through FDI. There exists a range of uncertainty 0 < σ < σ0 in which
the market entry is preponed. For these parameter constellations the likeliness of market entry
per period increases.

5 The Degree of Competition and Comparative Statics

A crucial aspect for an investor’s first time market entry decision is the degree of competition in
the potential destination country. Within the established framework we can measure the extent
of competition by considering the inverse of the country specific mark-up ν . Demand turns out
to be flat if ν approaches one. In such a case, the investor holds a low degree of market power as
the substitutability between the differentiated goods Xi is high.

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