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Uncertain Productivity Growth and the Choice between FDI and Export
Author(s) -
Yalcin Erdal,
Sala Davide
Publication year - 2014
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12105
Subject(s) - multinational corporation , foreign direct investment , argument (complex analysis) , economics , productivity , investment (military) , international trade , international economics , industrial organization , microeconomics , macroeconomics , finance , law , biochemistry , chemistry , politics , political science
While determinants of FDI patterns have received widespread attention, the timing of their surge remains largely unexplained. According to the proximity–concentration trade‐off argument, a surge in FDI in times of decaying international transportation costs seemingly represents a paradox. Besides transportation costs, other factors have contextually changed: in particular, the uncertainty that firms bear has increased. Enriching the classical choice problem of a multinational firm with insights from the literature on investment under uncertainty, we illustrate how different types of uncertainty determine the timing and optimal entry mode (i.e. FDI or export) of a multinational enterprise into a new market.