Foreign Direct Investment And Cost Uncertainty: Correlation And Learning Effects
- Topics:
- Foreign Direct Investment
- Tags:
- Currency & Foreign Exchange,
- Finance,
- Foreign Direct Investment,
- Foreign Direct Investment (FDI),
- Investment
- Source:
- Michigan State University
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Overview: We examine a foreign firm's choice between exporting and Foreign Direct Investment (FDI) under country-specific cost uncertainty. Unlike exporting, FDI exposes foreign and home firms to the common shock. This results in the correlation of strategies which harms firms. However, the exposure to common shocks also benefits firms by enabling them to learn each other's cost realization. The net effect is negative, however, implying that country-specific cost uncertainty forms a barrier to FDI. Globalization may stimulate FDI by reducing cost variability, i.e., the correlation effect, but can also retard FDI by causing faster cross-country information flows that obviates the learning benefit.
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Format: PDF | Size: 254KB | Date: May 2007 | Pages: 28
