Why Firms Provide Goods to Foreign Markets Using a Combination of Entry Modes: Foreign Direct Investment and Export
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This paper empirically explains why firms provide goods to foreign markets using a combination of two entry modes, foreign direct investment (FDI) and export. This research analyzes two factors, transaction costs and economies of scale, which differently impact the foreign market entry mode. The balanced panel data set of automobile companies is employed for empirical analysis. The empirical results show that there is a time lag before firms switch entry modes from export to FDI. A firm may choose exporting as an entry mode to satisfy the increased local demand in the short run. In the long run, a firm may expand its local production capacity through FDI to satisfy local demand. The findings also show that firms reaching the minimum efficient scale are more likely to expand foreign production capacities to meet local demand. However, firms with less than the minimum efficient scale prefer to expand domestic production of exportable goods rather than increase foreign production.
Abstract
This paper empirically explains why firms provide goods to foreign markets using a combination of two entry modes, foreign direct investment (FDI) and export. This research analyzes two factors, transaction costs and economies of scale, which differently impact the foreign market entry mode. The balanced panel data set of automobile companies is employed for empirical analysis. The empirical results show that there is a time lag before firms switch entry modes from export to FDI. A firm may choose exporting as an entry mode to satisfy the increased local demand in the short run. In the long run, a firm may expand its local production capacity through FDI to satisfy local demand. The findings also show that firms reaching the minimum efficient scale are more likely to expand foreign production capacities to meet local demand. However, firms with less than the minimum efficient scale prefer to expand domestic production of exportable goods rather than increase foreign production.
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