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Foreign Direct Investment and Exports Dynamics with Demand Learning

  • Kotseva, Rossitsa
  • Vettas, Nikolaos

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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  1. Rafael Rob, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Oxford University Press, vol. 58(4), pages 655-675.
  2. Bruce Kogut & Nalin Kulatilaka, 1994. "Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network," Management Science, INFORMS, vol. 40(1), pages 123-139, January.
  3. Vettas, N., 1996. "Investment Dynamics in Markets with Endogenous Demand," UFAE and IAE Working Papers 344.96, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  4. Pietra Rivoli & Eugene Salorio, 1996. "Foreign Direct Investment and Investment under Uncertainty," Journal of International Business Studies, Palgrave Macmillan, vol. 27(2), pages 335-357, June.
  5. Motta, Massimo, 1992. "Multinational firms and the tariff-jumping argument : A game theoretic analysis with some unconventional conclusions," European Economic Review, Elsevier, vol. 36(8), pages 1557-1571, December.
  6. 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.
  7. 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.
  8. 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.
  9. Satya P. Das, 1983. "Multinational Enterprise under Uncertainty," Canadian Journal of Economics, Canadian Economics Association, vol. 16(3), pages 420-28, August.
  10. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
  11. Rafael Rob & Nikolaos Vettas, 2003. "Foreign Direct Investment and Exports with Growing Demand," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 629-648.
  12. Schnitzer, Monika, 1999. "Expropriation and control rights: A dynamic model of foreign direct investment," Munich Reprints in Economics 19890, University of Munich, Department of Economics.
  13. 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.
  14. Michel Demers, 1991. "Investment under Uncertainty, Irreversibility and the Arrival of Information Over Time," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 333-350.
  15. Huntley Schaller & Fanny Demers & Michel Demers, 1993. "Investments Under Uncertainty and Irreversibility," Carleton Economic Papers 93-10, Carleton University, Department of Economics, revised Sep 1990.
  16. Giovanni Maggi, 1996. "Endogenous Leadership in a New Market," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 641-659, Winter.
  17. 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.
  18. Hoff, Karla, 1997. "Bayesian learning in an infant industry model," Journal of International Economics, Elsevier, vol. 43(3-4), pages 409-436, November.
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