Foreign Direct Investment and Exports with Growing Demand

Rafael Rob () and Nikolaos Vettas ()
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Rafael Rob: Department of Economics, University of Pennsylvania
Authors registered in the RePEc Author Service: Rafael Robb

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We explore entry into a foreign market with uncertain demand growth. A multinational can serve the foreign demand by two modes, or by a combination thereof: it can export its products, or it can create productive capacity via Foreign Direct Investment. The advantage of FDI is that it allows for lower marginal cost than exporting does. The disadvantage is that FDI is irreversible and, hence, entails the risk of creating underutilized capacity in the case that the market turns out to be small. The presence of demand uncertainty and irreversibility gives rise to an interior solution, where the multinational, under certain conditions, both exports its products and does FDI.

Keywords: Foreign Direct Investment; Entry; Exports; New Markets (search for similar items in EconPapers)
JEL-codes: D8 D92 F2 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2003-01-13
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Citations: View citations in EconPapers (79)

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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 (2001)
Working Paper: Foreign Direct Investment and Exports with Growing Demand (2001)
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