Theoretical and experimental insights on firms’ internationalization decisions under uncertainty

Nikolaos Georgantzís (), Rafael Moner-Colonques, Vicente Orts and José Sempere-Monerris
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Rafael Moner-Colonques: Dept. of Economics Analysis and ERI-CES, University of Valencia, Spain

No 2012041, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: We revisit and extend previous theoretical work on internationalization decisions by firms which are imperfectly informed on the state of the demand in the market into which they are planning to export or enter through foreign direct investment (FDI). The latter is a costly strategy mitigating the international firm's demand uncertainty, while the local firm is perfectly informed. We report results from an experimental test of the aforementioned framework which confirm dominant strategy play by local firms under both the good and bad states of the local demand. Also, the prediction that the magnitude of the FDI-specific cost determines whether foreign firms enter via FDI is confirmed in qualitative terms. However, in the case in which FDI is the dominant strategy under risk neutrality, less than full FDI adoption is obtained. We also find an unexpected interaction between the internationalization decision and the market strategy once entry has occurred, indicating the presence of relevant behavioral and strategic factors which are not anticipated by the theoretical model.

Keywords: mode of entry; risk and uncertainty; experiment (search for similar items in EconPapers)
JEL-codes: C92 D81 F12 (search for similar items in EconPapers)
Date: 2012-11-22
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:2012041

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