Working Paper: CEPR ID: DP5262
Authors: Rossitsa Kotseva; Nikolaos Vettas
Abstract: We model a firm's choice between exporting and investing in a foreign country in the presence of possibly persistent demand uncertainty. We allow for demand shocks that, while increasing expected profit, impede learning. The firm learns gradually, in a Bayesian fashion, by observing past demand realizations. We derive the optimal exports and investment paths, examine how they depend on the technology parameters and the structure of uncertainty and show that learning alone may explain the S-shape of these paths. Immediate investment is possible despite the presence of demand uncertainty, if there are significant positive demand shocks and learning is likely to take time.
Keywords: exports; foreign direct investment; investment dynamics; learning; uncertainty
JEL Codes: D83; D92; F21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand uncertainty (D89) | investment decisions (G11) |
| demand uncertainty (D89) | exports and FDI (F23) |
| learning from past sales (M31) | export and FDI decisions (F23) |
| demand shocks (E39) | optimal timing of investment (G11) |
| prior beliefs about demand (D12) | decision-making process (D70) |
| positive demand shocks (E00) | immediate investment in FDI (F21) |
| demand shocks (E39) | uncertainty persistence (D80) |
| investment conditions (F23) | investment timing (G11) |
| demand characteristics (D12) | mode of entry into foreign markets (F23) |