Why Firms Provide Goods to Foreign Markets Using a Combination of Entry Modes: Foreign Direct Investment and Export

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.