Foreign Direct Investment and Exports with Growing Demand

We explore entry into a foreign market with uncertain demand growth. A multina- tional can serve the foreign demand by two modes, or by a combination thereof: it can export its product, or it can create productive capacity via Foreign Direct Investment. The advantage of FDI is that it allows lower marginal cost than exports. The disad- vantage is that FDI is irreversible and, hence, entails the risk of creating under-utilized capacity in case the market turns out to be small. The presence of demand uncertainty and irreversibility gives rise to an interior solution, whereby the multinational does - under certain conditions - both exports and FDI.