Exporting vs FDI: The Proximity-Concentration Trade-Off.
Your firm wants to sell its product in each of several foreign countries, and you must decide whether to do so by exporting or by producing locally for that market through FDI. Suppose that in each country the demand for the product is the same, and is given by:
P = 15 – Q,
Where P is the price your firm charges in that country in dollars and Q is the quantity sold there. In addition, the marginal cost of production in any country is the same, and is equal to $4 per unit. Wherever you choose to produce, your firm is a monopolist. To produce in a foreign country, your firm must incur a fixed cost equal to $21. On the other hand, to produce here and export to a country that is d miles away requires a transport cost of (d/1000) dollars per unit shipped.
a. If you export to a given country located at a distance d, what would the quantity sold, the price charged and the profits be? (all as a function of distance)
b. If you sell in a given country by setting up a subsidiary, what would the quantity sold, the price charged and the profits be?
c. For what values of d will your profit-maximizing decision be the export option? The FDI option?