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Behavioural determinants of Foreign Direct Investment

  • Pinheiro-Alves, Ricardo

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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File URL: http://mpra.ub.uni-muenchen.de/10297/1/MPRA_paper_10297.pdf
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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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  1. 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.
  2. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
  3. Matthew Rabin., 1997. "Psychology and Economics," Economics Working Papers 97-251, University of California at Berkeley.
  4. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  5. Bruce A. Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," NBER Working Papers 11299, National Bureau of Economic Research, Inc.
  6. Robert J. Shiller, 2002. "From Efficient Market Theory to Behavioral Finance," Cowles Foundation Discussion Papers 1385, Cowles Foundation for Research in Economics, Yale University.
  7. Heiner, Ronald A., 1989. "The origin of predictable dynamic behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 12(2), pages 233-257, October.
  8. Frey, Bruno S. & Eichenberger, Reiner, 1994. "Economic incentives transform psychological anomalies," Journal of Economic Behavior & Organization, Elsevier, vol. 23(2), pages 215-234, March.
  9. Herbert A. Simon, 1991. "Organizations and Markets," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 25-44, Spring.
  10. Glaser, Markus & Nöth, Markus & Weber, Martin, 2003. "Behavioral Finance," Sonderforschungsbereich 504 Publications 03-14, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  11. 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.
  12. Mark Grinblatt, 2001. "How Distance, Language, and Culture Influence Stockholdings and Trades," Journal of Finance, American Finance Association, vol. 56(3), pages 1053-1073, 06.
  13. Akerlof, George A, 1983. "Loyalty Filters," American Economic Review, American Economic Association, vol. 73(1), pages 54-63, March.
  14. 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.
  15. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
  16. Zwiebel, Jeffrey, 1995. "Corporate Conservatism and Relative Compensation," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 1-25, February.
  17. Williamson, Oliver E, 1981. "The Modern Corporation: Origins, Evolution, Attributes," Journal of Economic Literature, American Economic Association, vol. 19(4), pages 1537-68, December.
  18. 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.
  19. 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.
  20. Heiner, Ronald A, 1983. "The Origin of Predictable Behavior," American Economic Review, American Economic Association, vol. 73(4), pages 560-95, September.
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