The effect of a firms market-entry timing on its time-to-build and cost-to-build its plant

This paper examines the effect of a firm’s market-entry timing on its time-to-build and cost-to-build its plant, by viewing its time-to-build its plant as its strategic choice under a time-cost tradeoff on its time-to-build its plant based on demand uncertainty (which primarily impacts revenues), and its experiential/vicarious learning over time on plant construc-tion (which impacts its costs). Based on my developed decision-theoretic model as well as game-theoretic (Stackelberg) model, I provide five scenarios of the firm’s market-entry timing effect on its time-to-build and cost-to-build its plant. Each scenario provides an empirically distinctive prediction concerning a firm’s time-to-build and cost-build its plant, which enables us to discern whether the revenue effect and/or the cost effect is substantially at play. I also conduct empirical tests of the theory derived from my models in the context of the Liquefied Natural Gas (LNG) industry from 1996 to 2007. To account for a potential endogeneity bias from self-selection, I adopt Wooldridge’s (2010) three-step instrumental variable (IV) approach and Heckman’s (1978, 1979) two-step control function (CF) approach, using price uncertainty as an instrumental variable. I find that the group of late-market entrants has (1) a shorter time-to-build their plant and (2) a higher cost-to-build their plant (per ton capacity) relative to the group of early-market entrants. Further, (3) the group of late-market entrants positively moderates the negative relationship of a firm’s time-to-build and cost-to-build its plant (per ton capacity). These empirical results are consistent with the prediction that both a revenue effect (i.e., revenue curve upward shift) and a cost effect (cost curve leftward shift) exist. These empirical findings suggest that a firm’s time-to-build its plant is an outcome of its strategic choice based on demand uncertainty and its experiential/vicarious learning over time on plant construction. These findings also suggest that the firms within the group of late-market entrants can have a higher cost-to-build their plant as an outcome of their strategic choice of time-to-build their plant even though the firms within this group improve their efficiency regarding a time-cost tradeoff relative to early-market entrants.