OVERVIEW l 13
reported by Europeans. However, these scores may not be strictly comparable, given that even though the survey question is the same, the European score was recorded for a random sample of the general public as opposed to this survey’s sampling of the business community.
Regional Pioneers and the Determinants of Investment Entry: Which Firms Succeed and Which Firms Do Not? An empirical estimation of a South Asian firm’s entry decision to a particular destination facilitates the characterization of pioneer investors. The determinants of entry for production investments, services investments, and trade-supporting services investments are estimated separately. Information, networks, and trust are analytically separated from traditional trade costs related to trade policy, trade facilitation, and transportation infrastructure. Information and networks are analyzed as primarily affecting the firm’s fixed entry costs of investing in a particular destination. The estimation is based on a flexible framework of a firm’s international engagement decision. Different engagement options have varying sunk entry costs, fixed costs, and trade costs. Sunk costs include market research, acquisition of knowledge of government regulations, and due diligence, and are unrecoverable fixed costs if the investment is not made. Two types of variation in sunk costs are important for this framework. First, sunk entry costs vary across engagement modes. Sunk costs are related to the fixed costs of the engagement and are ranked such that the entry costs of exporting are lower than the entry costs of investing. Further, entry costs for a trade-supporting investment (such as a representative office) are lower than for other types of investment (such as a factory or hotel). These points can be summarized thus: Fixed Entry Costs EXPORT < Fixed Entry Costs TRADE-SUPPORTING FDI < Fixed Entry Costs PRODUCTION OR SERVICES FDI Second, sunk costs vary across firm-destination pairs for the same engagement mode, which is how information barriers and differences in access to information across firms are introduced. All else equal, firms with better knowledge connectivity to a particular destination will have lower entry costs. These points can be summarized thus: Fixed Entry Costs NETWORKED OR HIGH-KNOWLEDGE-CONNECTIVITY FIRM < Fixed Entry Costs UNNETWORKED OR LOW-KNOWLEDGE-CONNECTIVITY FIRM The key findings are the following: Pioneer investors are high-productivity, large firms with investible surplus funds. High-productivity, large firms are the ones that invest abroad. They have the volume of production that provides the funds to incur the sunk costs of entry. This finding
