Working Paper: CEPR ID: DP9288
Authors: Monika Mrzov; J. Peter Neary
Abstract: We characterize how firms select between alternative ways of serving a market. ``First-order" selection effects, whether firms enter or not, are extremely robust. "Second-order" ones, how firms serve a market conditional on entry, are less so: more efficient firms will select into the entry mode with lower market-access costs, if and only if firms' maximum profits are supermodular in production and market access costs. Supermodularity holds in many cases but not in all. Exceptions include FDI (both horizontal and vertical) when demands are "sub-convex" (i.e., less convex than CES), fixed costs that vary with access mode, and R&D with threshold effects.
Keywords: Foreign Direct Investment (FDI); Heterogeneous Firms; Proximity-Concentration Tradeoff; R&D with Threshold Effects; Supermodularity; Subconvexity
JEL Codes: F12; F15; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| more productive firms (D21) | select into activities with higher fixed costs but lower variable costs (D21) |
| more efficient firms (D21) | opt for lower market-access costs (D40) |
| supermodularity in production and market access costs (L11) | more efficient firms opt for lower market-access costs (D40) |
| more efficient firms (D21) | engage in lower marginal cost activities (D22) |
| less efficient firms (D22) | engage in activities traditionally associated with higher efficiency (D61) |