Do firms maintain their chosen market serving mode over time if they are confronted with dynamic processes such as uncertain productivity? What are the determinants for switching between market serving modes over time? Within a partial equilibrium model which combines the proximity-concentration trade-off with a stochastic productivity evolution, we analyze the transition dynamics between domestic market serving, exporting and FDI. We find that a stochastic productivity development generates hysteresis, and thereby confirm a general real option result. Market serving mode switching is driven by country speci?c competition, irreversible fixed costs, productivity growth and volatility. Higher fixed costs and volatility increase the likeliness of serving mode continuity whereas a higher degree of competition and productivity growth raise the probability of serving mode switching.
Working paper, (pr)eprint
Export; FDI; Market Serving Strategy; Real Option
Main Research Area:
Aarhus School of Business, Aarhus University, Department of Economics, 2009