Scandinavian Working Papers in Economics

Discussion Papers on Economics,
University of Southern Denmark, Department of Economics

No 19/2012: Uncertain productivity growth and the choice between FDI and export

Erdal Yalcin () and Davide Sala ()
Additional contact information
Erdal Yalcin: ifo Institute for Economic Research, Postal: International Trade Department, Poschinger Str. 5, 81679 Munich, Germany
Davide Sala: Department of Business and Economics, Postal: University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark

Abstract: With aggregate sales by foreign affiliates exceeding world exports, determinants of FDI patterns have received great attention, while the timing of their surge has been understudied. Recent evidence indicates that transportation costs of goods have fallen too little to explain these figures based on the proximity-concentration trade-off argument alone. Contextually, other changes have occurred: in particular, the uncertainty that firms bear has increased. Enriching the classical choice problem of a multinational firm with insights from the investment literature, we show that increased uncertainty along with the sizable fixed costs characterizing engagements on international markets can explain specific FDI patterns.

Keywords: Proximity-concentration hypothethis; stochastic processes; real option

JEL-codes: F17; F21; F23

37 pages, September 7, 2012

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