Foreign Direct Investment as a Signal
24 Pages Posted: 9 Jan 2018
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: 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
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