70 l REGIONAL INVESTMENT PIONEERS IN SOUTH ASIA
replenishment strategies. Sales and profits will be higher than under exporting, but lower than under horizontal FDI. The logic presented above may be extended to illustrate a spectrum of entry options and respective magnitudes of fixed entry costs that a firm faces when it seeks to serve foreign markets. As listed in table 2.1, the sunk entry costs would be lowest if there were intermediaries at home—local firms or affiliates of a foreign customer firm or foreign trading firm. E-commerce has also brought down the cost of export entry. However, as the fixed costs of entry expand, the exporter firm receives greater control of its chain activities and has greater scope to adjust prices, adjust markups, and be responsive to consumers. This approach also broadens the scope for analyzing the relationship between exports and foreign investment in serving the foreign market, where horizontal FDI may be associated with lower exports but the vertical FDI associated with input sourcing would complement exports. Here, vertical FDI—in the form of trade-supporting FDI, distribution FDI, or retail FDI—complements exports and leads to progressively higher foreign sales. Based on the analysis given above, further propositions are developed: Proposition 8. Trading intermediaries and investment intermediaries may help smaller firms by reducing the fixed costs of trading and investing, respectively. Proposition 9. Firms with medium levels of productivity may invest in a single value chain activity abroad that requires lower fixed entry costs compared with horizontal FDI.
TABLE 2.1 Serving Foreign Markets: Alternative Modes in Rising Order of Fixed Entry Costs (1 Low–9 High) Indirect exporting 1
Intermediaries at home Direct exporting
2
Sales through digital platforms or e-commerce
3
To foreign distributor or agent
4
To foreign client firm
5
To foreign client firm with licensing of brand for retail investment
6
With own marketing office abroad (trade-supporting services FDI)
7
With own wholesale distribution abroad (wholesale services FDI)
8
With own wholesale and retail distribution abroad (wholesale and retail services FDI) No exporting
9
With own production and distribution abroad (horizontal FDI)
Source: World Bank. Note: FDI = foreign direct investment.
