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Foreign Direct Investment and Cost Uncertainty: Correlation and Learning Effects

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  • Anthony Creane
  • Kaz Miyagiwa

Abstract

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.

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  • Anthony Creane & Kaz Miyagiwa, 2007. "Foreign Direct Investment and Cost Uncertainty: Correlation and Learning Effects," Emory Economics 0711, Department of Economics, Emory University (Atlanta).
  • Handle: RePEc:emo:wp2003:0711
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    Cited by:

    1. Anthony Creane & Kaz Miyagiwa, 2007. "Export, Foreign Direct Investment, and Joint Ventures: Learning the Rival's Costs through Propinquity," Emory Economics 0710, Department of Economics, Emory University (Atlanta).
    2. Brindisi, Francesco & Çelen, Boğaçhan & Hyndman, Kyle, 2014. "The effect of endogenous timing on coordination under asymmetric information: An experimental study," Games and Economic Behavior, Elsevier, vol. 86(C), pages 264-281.

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