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Department of Economics, Aarhus School of Business, University of Aarhus Working Papers, Department of Economics, Aarhus School of Business, University of Aarhus

No 08-3:
The Proximity-Concentration Trade-Off under Goods Price and Exchange Rate Uncertainty

Erdal Yalcin ()

Abstract: The underlying model combines the proximity-concentration trade-off framework with the real option approach. In contrast to the latest trade models, uncertainty is introduced as a continuous phenomenon. Furthermore, the model contains the innovation of comparing two option values simultaneously. The implementation of goods price uncertainty turns out to reduce the probability of entering a new market as an exporter. FDI becomes the optimal entry mode with increasing uncertainty. Additionally, the model is extended by implementing exchange rate uncertainty in a period of appreciation

Keywords: Export; FDI; Uncertainty; Real Option Approach; (follow links to similar papers)

JEL-Codes: D81; D92; F17; F21; F23; (follow links to similar papers)

59 pages, March 18, 2008

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