To lead or to wait? An application to internationalization strategies under demand uncertainty

Abstract

We examine the exports versus foreign direct investment (FDI) decision under demand uncertainty for an asymmetric cost duopoly. One of the firms can lead entry before demand realization or retain flexibility enjoying an informational advantage. When the time value of information is small and for sufficiently low investment costs, follow‐the‐leader behavior in FDI arises. Relatively high investment (fixed) costs result in follow‐the‐leader exporting behavior. When the time value of information becomes significant, the potential leader will opt for a wait‐and‐see strategy. For intermediate values of investment costs, the efficient firm invests, while the rival chooses to export.

Leadership in internationalization strategies

“…Spencer and Brander (1992) present a duopoly model with uncertainty in demand where one firm has exogenously been given the possibility to commit the quantity before the realization of the uncertainty, taking advantage of moving first and acting as a Stackelberg leader; or defer its decision till the uncertainty is resolved, thereby losing its leading role but allowing her to adjust output. Their paper can be extended to apply the dichotomy pre-commitment versus flexibility to the internationalization strategies of heterogeneous firms (Barac & Moner-Colonques, 2019). It can be shown that follow-the-leader behaviour in FDI happens when setup costs are small and demand uncertainty is low enough.…”