Foreign Direct Investment as a Signal

24 Pages Posted: 9 Jan 2018

See all articles by Onur A. Koska

Onur A. Koska

University of Tuebingen - Department of Economics

Ngo Van Long

McGill University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Frank Stähler

University of Tuebingen - Department of Economics; University of Adelaide - School of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 2018

Abstract

This paper models oligopolistic competition among potential multinational firms in an environment of firm heterogeneity, incomplete information on costs, and strategic interactions. We show that foreign direct investment is more likely if it can serve as a signal of productivity in an environment of incomplete information as firms would like to avoid sending a low productivity signal. Our model shows that this effect is strong enough such that foreign direct investment can be an optimal foreign entry mode even if trade costs are zero.

Suggested Citation

Koska, Onur A. and Van Long, Ngo and Stähler, Frank, Foreign Direct Investment as a Signal (February 2018). Review of International Economics, Vol. 26, Issue 1, pp. 60-83, 2018, Available at SSRN: https://ssrn.com/abstract=3098550 or http://dx.doi.org/10.1111/roie.12303

Onur A. Koska (Contact Author)

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

Ngo Van Long

McGill University - Department of Economics ( email )

855 Sherbrooke Street West
Montreal, QC H3A 2T7
Canada
514-398-4850 (Phone)
514-398-4938 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Frank Stähler

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

HOME PAGE: http://www.frank-staehler.de

University of Adelaide - School of Economics ( email )

Adelaide SA, 5005
Australia

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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