Duopolistic Competition and Optimal Switching Time from Export to Fdi in Uncertainty

Summary: This paper aimed to extend previous real option models to features of multinational firms’ activities such as market competition and trade barriers. Few researchers have studied multinationals’ optimal switching time from export to FDI using real options, and those who have done so have ignored trade policies and strategic interactions between firms. Yet, the presence of local competitors and trade costs influences the option value of waiting. We find that FDI in host countries with uncertain demand, strong competition and few barriers to trade will likely to be delayed with respect to immediate investment. In terms of policy implications, we find that the trade and competition policies of host countries have lower deterrent effects on FDI when uncertainty is reduced.