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The Value of Waiting: Foreign Direct Investment with Uncertainty and Imperfect Local Knowledge

  • Yongil Jeon

    (Central Michigan University)

  • Taekwon Kim

    (Yonsei University)

  • Stephen M. Miller

    (University of Connecticut and University of Nevada, Las Vegas)

This paper examines the role of uncertainty and imperfect local knowledge in foreign direct investment. The main idea comes from the literature on investment under uncertainty, such as Pindyck (1991) and Dixit and Pindyck (1994). We empirically test .the value of waiting. with a dataset on foreign direct investment (FDI). Many factors (e.g., political and economic regulations) as well as uncertainty and the risks due to imperfect local knowledge, determine the attractiveness of FDI. The uncertainty and irreversibility of FDI links the time interval between permission and actual execution of such FDI with explanatory variables, including information on foreign (home) countries and domestic industries. Common factors, such as regulatory change and external shocks, may affect the uncertainty when foreign investors make irreversible FDI decisions. We derive testable hypotheses from models of investment under uncertainty to determine those possible factors that induce delays in FDI, using Korean data over 1962 to 2001.

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File URL: http://web2.uconn.edu/economics/working/2004-44.pdf
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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2004-44.

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Length: 33 pages
Date of creation: Jul 2004
Date of revision:
Handle: RePEc:uct:uconnp:2004-44
Contact details of provider: Postal: University of Connecticut 365 Fairfield Way, Unit 1063 Storrs, CT 06269-1063
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Web page: http://www.econ.uconn.edu/

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  1. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-48, September.
  2. Gregory K. Bell & José M. Campa, 1997. "Irreversible Investments And Volatile Markets: A Study Of The Chemical Processing Industry," The Review of Economics and Statistics, MIT Press, vol. 79(1), pages 79-87, February.
  3. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  4. Jos� Manuel Campa, 1994. "Multinational Investment under Uncertainty in the Chemical Processing Industries," Journal of International Business Studies, Palgrave Macmillan, vol. 25(3), pages 557-578, September.
  5. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
  6. 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.
  7. Buckley, Adrian & Tse, Kalun, 1996. "Real operating options and foreign direct investment: A synthetic approach," European Management Journal, Elsevier, vol. 14(3), pages 304-314, June.
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