Scandinavian Working Papers in Economics

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

No 09-13: Switching between Domestic Market Activity, Export and FDI

Sanne Hiller () and Erdal Yalcin ()
Additional contact information
Sanne Hiller: Department of Economics, Aarhus School of Business, Postal: FRICHSHUSET , Hermodsvej 22, DK 8230 Aabyhoej, Denmark
Erdal Yalcin: Eberhard Karls University, Postal: Nauklerstr. 47, D-72074, Germany

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

JEL-codes: F11; F37

49 pages, August 1, 2009

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