Working Papers, Department of Economics, Aarhus School of Business, University of Aarhus
Switching between Domestic Market Activity, Export and FDI
() and Erdal Yalcin
Abstract: Do rms maintain their chosen market serving mode over time
if they are confronted with dynamic processes such as uncertain
productivity? What are the determinants for switching between market
serving modes over time? Within a partial equilib- rium model which
combines the proximity-concentration trade-o with a stochastic
productivity evolution, we analyze the transition dynamics between domestic
market serving, exporting and FDI. We nd that a stochastic productivity
development gen- erates hysteresis, and thereby con rm a general real
option result. Market serving mode switching is driven by country speci c
competition, irreversible xed costs, pro- ductivity growth and volatility.
Higher xed costs and volatility increase the likeliness of serving mode
continuity whereas a higher degree of competition and productivity growth
raise the probability of serving mode switching.
Keywords: Export; FDI; Market Serving Strategy; Real Option; (follow links to similar papers)
JEL-Codes: F11; F37; (follow links to similar papers)
49 pages, August 1, 2009
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