Working Paper: CEPR ID: DP9332
Authors: Paola Conconi; Andr Sapir; Maurizio Zanardi
Abstract: This paper shows that uncertainty can lead firms to follow a gradual internationalization process. We describe a model in which firms are uncertain about their ability to earn profits in a foreign market and must decide whether or not to serve it, and whether to do so through exports or foreign affiliate sales. We show that a firm may first test the foreign market via exports, before engaging in foreign direct investment (FDI). To assess the evidence, we exploit a unique dataset of firm-level exports and FDI in individual destination countries, covering all Belgian companies over the 1998-2008 period. We show that a firm?s FDI entry in a foreign market is almost always preceded by its export entry. More uncertain foreign market conditions lead new exporters to delay FDI entry decisions. Our analysis suggests that exports and FDI, although substitutes from a static perspective, may be complements over time, since the knowledge acquired through export experimentation can lead firms to start investing abroad.
Keywords: experimentation; exports; FDI; uncertainty
JEL Codes: D21; F10; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| export entry (F10) | FDI entry (F23) |
| uncertain foreign market conditions (F31) | FDI entry decisions (F23) |
| export experience (F10) | probability of FDI entry (F23) |
| higher exit rates and regulatory variance (K20) | likelihood of FDI entry (F23) |