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 common shocks. This results in a correlation of strategies, harming the firms. However, the exposure to common shocks also benefits the firms by enabling them to learn each other’s cost realization. The net effect is negative, implying that country-specific cost uncertainty forms a barrier to FDI. The foreign firm, then, chooses exporting unless FDI gives it a substantial cost advantage. Therefore, when FDI actually occurs, the home firm is hurt but consumers always benefit.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number
0711.
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)