The Internationalization Process of Firms: From Exports to FDI?

National Bank of Belgium Working Paper No. 198

45 Pages Posted: 16 Oct 2010

See all articles by Paola Conconi

Paola Conconi

Centre for Economic Policy Research (CEPR); Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES)

André Sapir

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Bruegel; Centre for Economic Policy Research (CEPR)

Maurizio Zanardi

Lancaster University - Department of Economics

Date Written: October 2010

Abstract

We describe a simple model in which domestic firms decide whether to serve a foreign market through exports or horizontal foreign direct investment (FDI). This choice involves a trade-off between the higher variable trade costs associated with exports and the higher fixed set-up costs associated with establishing foreign subsidiaries. Crucially, firms are uncertain about their profitability in foreign markets and can only learn it by operating there. To obtain market-specific knowledge, firms may follow an “internationalization process”, serving the foreign market via exports first and eventually, in some cases, switching to local subsidiary sales. To assess the validity of the predictions of our model, we use firm-level data on export and FDI decisions in individual destination markets for all companies registered in Belgium over the period 1997-2008. We show that firms’ strategies to serve foreign markets depend not only on the variable and fixed costs associated with exports and FDI, but also on the export experience they have acquired in that market.

Keywords: Exports, FDI, Uncertainty, Experimentation

JEL Classification: F10, D21, F13

Suggested Citation

Conconi, Paola and Sapir, Andre and Zanardi, Maurizio, The Internationalization Process of Firms: From Exports to FDI? (October 2010). National Bank of Belgium Working Paper No. 198, Available at SSRN: https://ssrn.com/abstract=1692585 or http://dx.doi.org/10.2139/ssrn.1692585

Paola Conconi (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
32 2 650 2345 (Phone)
32 2 650 4475 (Fax)

Andre Sapir

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
+32 2 650 2345/4 (Phone)
+32 2 650 4475 (Fax)

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Maurizio Zanardi

Lancaster University - Department of Economics ( email )

Lancaster LA1 4YX, LA1 4YX
United Kingdom

HOME PAGE: http://www.lancaster.ac.uk/staff/zanardi/

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