Foreign Direct Investment and Exports with Growing Demand

56 Pages Posted: 18 Jan 2003

See all articles by Rafael Rob

Rafael Rob

University of Pennsylvania - Department of Economics

Nikolaos Vettas

Athens University of Economics and Business - Department of Economics; National Kapodistrian University of Athens - Faculty of Economics; Centre for Economic Policy Research (CEPR)

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Date Written: January 13, 2003

Abstract

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

Keywords: Foreign Direct Investment, Entry, Exports, New Markets

JEL Classification: D8, D92, F2

Suggested Citation

Rob, Rafael and Vettas, Nikolaos, Foreign Direct Investment and Exports with Growing Demand (January 13, 2003). Available at SSRN: https://ssrn.com/abstract=370660 or http://dx.doi.org/10.2139/ssrn.370660

Rafael Rob (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
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215-898-6775 (Phone)
215-573-2057 (Fax)

Nikolaos Vettas

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
GR-10434 Athens
Greece
+30 210 8203179 (Phone)

National Kapodistrian University of Athens - Faculty of Economics ( email )

8 Pesmazoglou street
GR-10559 Athens
Greece
+30 210 8203179 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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