Foreign Direct Investment and Exports with Growing Demand

Rafael Rob and Nikolaos Vettas ()
Authors registered in the RePEc Author Service: Rafael Robb

No 2786, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We explore entry into a foreign market with uncertain demand growth. A multinational can serve the foreign demand in two ways, or by a combination thereof: it can export its product, or it can create productive capacity via Foreign Direct Investment. The advantage of FDI is that it allows lower marginal cost than exports. The disadvantage is that FDI is irreversible and, hence, entails the risk of creating under-utilized capacity in case the market turns out to be smaller than expected. The presence of demand uncertainty and irreversibility gives rise to an interior solution, whereby the multinational does - under certain conditions - both exports and FDI. We argue that this feature is consistent with observed behaviour of multinationals, yet it has not arisen in previous theoretical formulations.

Keywords: Entry; Exports; New markets; Investment under uncertainty; Foreign direct investment (search for similar items in EconPapers)
JEL-codes: D80 D92 F20 (search for similar items in EconPapers)
Date: 2001-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Foreign Direct Investment and Exports with Growing Demand (2003)
Working Paper: Foreign Direct Investment and Exports with Growing Demand (2003)
Working Paper: Foreign Direct Investment and Exports with Growing Demand (2001)
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