DP9332 The Internationalization Process of Firms: from Exports to FDI

Author(s): Paola Conconi, André Sapir, Maurizio Zanardi
Publication Date: February 2013
Keyword(s): experimentation, exports, FDI, uncertainty
JEL(s): D21, F10, F13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9332

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.