Scandinavian Working Papers in Economics

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

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

Erdal Yalcin ()
Additional contact information
Erdal Yalcin: International Economics, Postal: Eberhard Karls University, Nauklerstr. 47, 72074 Tübingen, Germany

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

JEL-codes: D81; D92; F17; F21; F23

59 pages, March 18, 2008

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08-3_ey.pdf PDF-file 

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