Uncertain Productivity Growth and the Choice between FDI and Export

Uncertain Productivity Growth

(a) Country A (Low Competition)
νA = 0.75

(b) Country B (High Competition)
νB = 0.9

(c) Degree of Competition & Relative Cost Patterns

Figure 10: Competition Effects

Figure 10 depicts the export and FDI value functions in two different countries. The investor is
confronted with exactly the same cost patterns in both foreign markets.¹⁷ The only difference
appears in the degree of competition, with country A exhibiting a lower competition between
the differentiated goods Xi than country B (νA < νB). In the low competition case, the given
relative cost pattern leads to an export productivity cut-off tf*E_l which is lower than the FDI
cut-off. Simultaneously, given the degree of competition, the upper envelope function in panel
a) turns out to be dominated by the option and investment value function of the export mode.
Assuming that the initial productivity level $0 is below tf*E_l, the investor will definitely serve the
¹⁷In both markets the investor is confronted with the following cost structure: IE = 2, τ = 1.3, θ = 0.5, WWF = 1, r =

0.06, α = 0.02, σ = 0.01.                                                             ^{F                          E}

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