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Behavioural Determinants Of Foreign Direct Investment

  • Ricardo Pinheiro Alves

    ()

    (Gabinete de Estratégia e Estudos, Ministério da Economia e da Inovação)

The paper presents a behavioural economics approach to foreign direct investment. Starting from behavioural finance theory, it uses content analysis from interviews made to Portuguese managers with investments abroad. The study presents evidence of herding, anchoring, overconfidence, mental accounting and other behaviour rules in firms’ location decisions that originate a set of determinants of FDI flows and complement the neoclassical paradigm. Moreover, it confirms the Heiner model (1983, 1985, 1989) by showing that the higher the uncertainty faced by decision makers the more frequent will be the use of behavioural rules. The central role of uncertainty helps explain why FDI flows occur more frequently among developed countries.

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File URL: http://www.gee.min-economia.pt/RePEc/WorkingPapers/paper-rpa.pdf
File Function: First version, 2008
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Paper provided by Gabinete de Estratégia e Estudos, Ministério da Economia e da Inovação in its series GEE Papers with number 0008.

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Length: 41 pages
Date of creation: Dec 2008
Date of revision: Dec 2008
Handle: RePEc:mde:wpaper:0008
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  1. Akerlof, George A, 1983. "Loyalty Filters," American Economic Review, American Economic Association, vol. 73(1), pages 54-63, March.
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  10. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
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  13. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
  14. Bruce A. Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," NBER Working Papers 11299, National Bureau of Economic Research, Inc.
  15. Zwiebel, Jeffrey, 1995. "Corporate Conservatism and Relative Compensation," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 1-25, February.
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  17. 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.
  18. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
  19. Yuko Kinoshita & Ashoka Mody, 2001. "Private information for foreign investment in emerging economies," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 448-464, May.
  20. Horstmann, Ignatius J. & Markusen, James R., 1992. "Endogenous market structures in international trade (natura facit saltum)," Journal of International Economics, Elsevier, vol. 32(1-2), pages 109-129, February.
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