‘Dressing up’ to export? A real option approach to international entrepreneurship

In a recent paper published in the Quarterly Review of Economics and Finance, entitled “Playing the lottery or dressing up? A model of firm-level heterogeneity and the decision to export”, MSM’s Professor Wim Naudé and colleagues Professor Thomas Gries and Dr. Natasha Bilkic from Paderborn University in Germany propose a new mathematical model to understand international entrepreneurship, using real option theory.

In their model they illustrate that exporting is an investment decision with a real option value and that whether not a firm exports is a matter of timing. Some firms may always find it more worthwhile to postpone exporting, depending on the nature of the product, the target market, and firm-level characteristics. For instance, their model shows that firms evaluating exporting to a volatile, or two foreign markets, will need more time to dress up (prepare) for this. They derive implications for policies to support exporting.

Their model contributes to the field of theoretical economics of international trade, in particular the so-called models of firm heterogeneity. In these models, whether firms export or not depend on their productivity. These models assume that firms enter a market only to find their productivity levels revealed to them as in a lottery. However, as the authors argue in their paper, if productivity is not determined as in a lottery, why do some firms export early and some late? Their paper contributes towards answering this question.

Read the paper here:https://ideas.repec.org/a/eee/quaeco/v58y2015icp1-17.html#biblio