Foreign Direct Investment and Cost Uncertainty: Correlation and Learning Effects

28 Pages Posted: 12 Jul 2007

See all articles by Anthony Creane

Anthony Creane

University of Kentucky

Kaz Miyagiwa

Emory University - Department of Economics; Osaka University - Institute of Social and Economic Research (ISER); Florida International University (FIU) - Department of Economics

Date Written: July 2007

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.

Keywords: information, FDI, access mode selection, cost uncertainty, globalization

JEL Classification: D83, F12

Suggested Citation

Creane, Anthony and Miyagiwa, Kaz, Foreign Direct Investment and Cost Uncertainty: Correlation and Learning Effects (July 2007). ISER Discussion Paper No. 694. Available at SSRN: https://ssrn.com/abstract=1000105 or http://dx.doi.org/10.2139/ssrn.1000105

Anthony Creane

University of Kentucky ( email )

Lexington, KY 40506
United States

Kaz Miyagiwa (Contact Author)

Emory University - Department of Economics ( email )

1602 Fishburne Drive
Atlanta, GA 30322
United States

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki Osaka 567-0047
Japan

Florida International University (FIU) - Department of Economics ( email )

Miami, FL 33199
United States

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