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Foreign Direct Investment and Exports Dynamics with Demand Learning

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Author Info
Kotseva, Rossitsa
Vettas, Nikolaos
Abstract

We model a firm's choice between exporting and investing in a foreign country in the presence of possibly persistent demand uncertainty. We allow for demand shocks that, while increasing expected profit, impede learning. The firm learns gradually, in a Bayesian fashion, by observing past demand realizations. We derive the optimal exports and investment paths, examine how they depend on the technology parameters and the structure of uncertainty and show that learning alone may explain the S-shape of these paths. Immediate investment is possible despite the presence of demand uncertainty, if there are significant positive demand shocks and learning is likely to take time.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5262.

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Date of creation: Oct 2005
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Handle: RePEc:cpr:ceprdp:5262

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Related research
Keywords: exports; foreign direct investment; investment dynamics; learning; uncertainty;

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Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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  1. Schnitzer, Monika, 1999. "Expropriation and control rights: A dynamic model of foreign direct investment," International Journal of Industrial Organization, Elsevier, vol. 17(8), pages 1113-1137, November. [Downloadable!] (restricted)
    Other versions:
  2. Demers, Michel, 1991. "Investment under Uncertainty, Irreversibility and the Arrival of Information over Time," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 333-50, April. [Downloadable!] (restricted)
  3. Satya P. Das, 1983. "Multinational Enterprise under Uncertainty," Canadian Journal of Economics, Canadian Economics Association, vol. 16(3), pages 420-28, August. [Downloadable!] (restricted)
  4. George Norman, 1998. "Foreign Direct Investment and International Trade: a Review," Discussion Papers Series, Department of Economics, Tufts University 9810, Department of Economics, Tufts University. [Downloadable!]
  5. Ignatius J. Horstmann & James R. Markusen, 1995. "Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise," NBER Working Papers 5029, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Giovanni Maggi, 1996. "Endogenous Leadership in a New Market," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 641-659, Winter. [Downloadable!] (restricted)
  7. Pietra Rivoli & Eugene Salorio, 1996. "Foreign Direct Investment and Investment under Uncertainty," Journal of International Business Studies, Palgrave Macmillan Journals, vol. 27(2), pages 335-357, June. [Downloadable!] (restricted)
  8. Rafael Rob & Nikolaos Vettas, 2003. "Foreign Direct Investment and Exports with Growing Demand," PIER Working Paper Archive 03-001, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
  9. Buckley, Peter J & Casson, Mark, 1981. "The Optimal Timing of a Foreign Direct Investment," Economic Journal, Royal Economic Society, vol. 91(361), pages 75-87, March. [Downloadable!] (restricted)
  10. Vettas, Nikolaos, 2000. "Investment Dynamics in Markets with Endogenous Demand," Journal of Industrial Economics, Blackwell Publishing, vol. 48(2), pages 189-203, June. [Downloadable!] (restricted)
  11. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November. [Downloadable!] (restricted)
  12. Rafael Rob & Nikolaos Vettas, 2003. "Foreign Direct Investment and Exports with Growing Demand," Review of Economic Studies, Blackwell Publishing, vol. 70(3), pages 629-648, 07. [Downloadable!] (restricted)
  13. Itagaki, Takao, 1991. "A two-step decision model of the multinational enterprise under foreign demand uncertainty," Journal of International Economics, Elsevier, vol. 30(1-2), pages 185-190, February. [Downloadable!] (restricted)
  14. Goldberg, Linda S & Kolstad, Charles D, 1995. "Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 855-73, November. [Downloadable!] (restricted)
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  15. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Blackwell Publishing, vol. 58(4), pages 655-75, July. [Downloadable!] (restricted)
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