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Behavioural determinants of Foreign Direct Investment

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  • Pinheiro-Alves, Ricardo

Abstract

The paper presents a behavioural economics approach to foreign direct investment. Starting from the behavioural finance literature, it uses content analysis based on interviews and questionnaires covering 12% of the Portuguese firms with investments abroad. The study presents evidence of several behavioural rules (e.g., herding, cascading, anchoring, overconfidence, mental accounting) in firms’ location decisions that originate a new set of determinants of FDI flows and complement the neo classical paradigm. Moreover, it confirms the Heiner model (1983, 1985, 1989) by showing that the higher is the uncertainty faced by decision makers the more frequent is the use of behavioural rules. The central role of uncertainty helps explaining why FDI flows occur more frequently among developed countries.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10297.

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Date of creation: 21 Jul 2008
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Handle: RePEc:pra:mprapa:10297

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Keywords: Behavioural; Foreign Direct Investment; Uncertainty;

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  1. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
  2. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  3. Heiner, Ronald A., 1989. "The origin of predictable dynamic behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 12(2), pages 233-257, October.
  4. Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
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  7. Glaser, Markus & Nöth, Markus & Weber, Martin, 2003. "Behavioral Finance," Sonderforschungsbereich 504 Publications 03-14, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  8. Akerlof, George A, 1983. "Loyalty Filters," American Economic Review, American Economic Association, vol. 73(1), pages 54-63, March.
  9. Hosseini, Hamid, 2005. "An economic theory of FDI: A behavioral economics and historical approach," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 34(4), pages 528-541, August.
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  15. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
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  17. Frey, Bruno S. & Eichenberger, Reiner, 1994. "Economic incentives transform psychological anomalies," Journal of Economic Behavior & Organization, Elsevier, vol. 23(2), pages 215-234, March.
  18. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-41, September.
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  20. Williamson, Oliver E, 1981. "The Modern Corporation: Origins, Evolution, Attributes," Journal of Economic Literature, American Economic Association, vol. 19(4), pages 1537-68, December.
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Cited by:
  1. Alexandra Tabova, 2013. "Portfolio diversification and the cross-sectional distribution of foreign investment," International Finance Discussion Papers 1091, Board of Governors of the Federal Reserve System (U.S.).
  2. Kotov, Denis, 2013. "Behavioral Biases and Corporate Decision Making on Investing Abroad," MPRA Paper 49858, University Library of Munich, Germany.

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