Uncertain Productivity Growth and the Choice between FDI and Export

Uncertain Productivity Growth

6 Conclusion

Whether firms serve a new foreign market through exports or horizontal FDI has become a fron-
tier research field in international economics. Major contributions have been conducted under the
umbrella of the New New Trade Theory where the seminal work by Helpman et al. (2004) paved
the way for different analyses. In the tradition of international economics these models are framed
as static general equilibrium models and perform empirically very well (Helpman, 2006). A major
result within this strand of literature is that firms serving a foreign market through export tend
to be less productive than those entering the market through horizontal FDI. Furthermore, a
higher productivity dispersion within a sector seems to increase the share of FDI entrants.

One neglected aspect within these models are dynamic elements, in particular the fact that pro-
ductivity growth is a continuous stochastic variable. The question e.g. whether volatile produc-
tivity growth might have a selection effect on market entry modes over time can not be answered.
On the other hand from a firm perspective, productivity is a dynamic decision variable accounted
for by decision takers. CEOs of multinational enterprises have certain expectations on their com-
panies’ productivity development and try to optimize their market entry modes intertemporally.
Empirically, a boost in FDI could be observed especially in the mid 1980 and 1990 (UNCTAD,
2008) associated with disproportional growth in firm productivity due to information technol-
ogy (IT) improvements. Given these observations and the lack of dynamic models accounting
for timing effects, the underlying model elaborates market entry choice of a multinational firm.
By combining the proximity-concentration trade-off framework with the real option methodology
several results are derived which contribute to the existing literature. Within the assumed specific
costs patterns productivity growth turns out to favor FDI as the optimal market entry strategy.
The higher the productivity growth rate is the more likely is a firm to enter the new foreign
market as a foreign direct investor. Since productivity growth is a volatile process (Baily et al.
2001) the model accounts for uncertainty. A riskier productivity growth turns out to increase
the likeliness of market entry through FDI even further. This result coincides with the New New
Trade Theory findings where sectors with a higher productivity distortion exhibit higher FDI
shares. Finally the model offers the possibility to quantify the first time market entry time given
an uncertain growth rate. The crucial result of the model is that both productivity growth and
uncertainty increase the likeliness of market entry as foreign direct investor.

40

<<   39   40   41   42   43   44   45   >>

More intriguing information