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

Author

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  • Yongil Jeon

    (Central Michigan University)

  • Taekwon Kim

    (Yonsei University)

  • Stephen M. Miller

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

Abstract

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.

Suggested Citation

  • Yongil Jeon & Taekwon Kim & Stephen M. Miller, 2004. "The Value of Waiting: Foreign Direct Investment with Uncertainty and Imperfect Local Knowledge," Working papers 2004-44, University of Connecticut, Department of Economics.
    • Handle: RePEc:uct:uconnp:2004-44
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    References listed on IDEAS

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    1. 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.
    2. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-1148, September.
    3. Pietra Rivoli & Eugene Salorio, 1996. "Foreign Direct Investment and Investment under Uncertainty," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 27(2), pages 335-357, June.
    4. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    5. José Manuel Campa, 1994. "Multinational Investment under Uncertainty in the Chemical Processing Industries," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 25(3), pages 557-578, September.
    6. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    7. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
    8. 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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    Cited by:

    1. Axarloglou, Kostas & Kouvelis, Panos, 2007. "Hysteresis in adjusting the ownership structure of foreign subsidiaries," International Business Review, Elsevier, vol. 16(4), pages 494-506, August.

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    More about this item

    Keywords

    Foreign Direct Investment; Irreversibility; Uncertainty; Imperfect information; Investment Delay;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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