Comparing Foreign Direct Investments and Exports as Methods of Foreign Market Penetration

Abstract

Over the last few decades, a rising proportion of modern day businesses attempts to broaden the sales of goods and services across borders, to foreign customers, in order to remain competitive. Political, economic and technological barriers rapidly disappearing are factors that promote global trade. Entry mode selection is a very critical strategic decision and when deciding whether and how to serve foreign markets and participate in the international economy, firms can choose from a menu of options, with the most discussed being trading and producing goods and services abroad. The question we are concerned with in this paper is in which situations a firm should undertake exports, and in which to engage in foreign direct investments (FDIs) and serve foreign demand locally. The decision between trade and FDI is ever more important, because of the economic austerity, and is being paid a lot of attention from a vast literature in international businessstudies, both at national and international level, making it really intriguing and mind-opening for a student, in particular, to find and present more aggregate data on this subject. The method a business chooses to penetrateinto new markets is dependent on a number of parameters, related to the destination market’s attributes, such as the investment and economic environment, the size and the potentials the market can provide to a company that locates in its boarders. Additionally, firm’s characteristics, such as the level of productivity, the intangible assets available and the overall business strategy, can affect the company’s choice. We also examine companies’ optimal entry modes into foreign markets as a function of the possibility of externalities created from a FDI involvement and the role risk diversification plays. The remainder of this dissertation is structured in four parts. The first contribution is to present, in the next section, the theoretical background on international business activities and analyze the forms it takes, focusing on the FDI’s classifications. Secondly, in section 3, to analyze the economic theory that focuses on the comparison between FDI and exporting as modes to reach global markets and of course address some of the adverse determining parameters and consequences of each decision. Continuing, globalization acquires a higher profile when it is measured by actual trade flows, so in section 4, we employ our empirical analysis, by exploring how the international trade and investment have evolved through economic history and the global economic trends of, trying to see how close the reality is to the theory discussed. Finally, in section 5, we sum up by reviewing both the theoretical and the empirical results for the issue of foreign market entry mode, from the perspective of an investor or a businessman interested in international trade.