Sunk Costs, Firm Size, and Internationalization

Sunk Costs, Firm Size, and Internationalization. — One strand of the industrial organization literature argues that outlays on sunk costs are endogenous in market expansion, implying an adaptive adjustment by firms to preserve their market share. A different view is taken in the literature on firms’ internationalization. Here it is argued that sunk costs in firm-specific assets, such as R&D and marketing, are necessary in order to grow and gain market shares. The empirical analysis supports the internationalization hypothesis. In addition, we also provide evidence that even though larger firms incur higher sunk costs, they do so at a diminishing rate.