Optimal Timing of Foreign Direct Investment Under Uncertainty (original) (raw)

Journal of Transnational Management Development, 1998

Abstract

SUMMARY This paper constructs a two period model to examine a firm's choice between exporting and foreign direct investment (FDI) in the face of demand uncertainty. FDI involves higher fixed costs, some of which are sunk, whereas exporting involves a higher marginal cost. Initial exporting yields information about demand without incurring the fixed costs of FDIsince export sales reveal the state of demand abroad. It follows then that exporting carries an option val-ue-if a significant portion of fixed costs of FDI are sunk, a firm may initially export to a market and directly invest if demand conditions abroad are favorable.

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