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A Signalling Model of Firms' Foreign Direct Investment Relocation Decision

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  • Rosa Forte
  • Antonio Brandao

Abstract

We analyse whether the foreign government can influence the multinational firm's relocation decision, through signalling the amount of subsidy it can grant. The foreign country is one of two possible types which differ on their investment conditions. Comparing the results obtained with an adverse selection model (the government knows the country type but the firm does not) with the results of a signalling model, we conclude that relocation is more likely, and the necessary subsidy is smaller, in the signalling model than with adverse selection. This can explain the proliferation of Investment Support Agencies worldwide.

Suggested Citation

  • Rosa Forte & Antonio Brandao, 2008. "A Signalling Model of Firms' Foreign Direct Investment Relocation Decision," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 15(3), pages 339-357.
  • Handle: RePEc:taf:ijecbs:v:15:y:2008:i:3:p:339-357
    DOI: 10.1080/13571510802465112
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    References listed on IDEAS

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    1. Gordon H. HANSON, 2001. "Should Countries Promote Foreign Direct Investment?," G-24 Discussion Papers 9, United Nations Conference on Trade and Development.
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    More about this item

    Keywords

    Multinational Firms; Relocation of Production; Signalling Model;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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