Investing in Terra Incognita: Waiting and Learning

25 Pages Posted: 15 Apr 1998  

Christian Thimann

AXA Group

Marcel P. Thum

Dresden University of Technology - Faculty of Economics and Business Management; CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute; Institute for Corruption Studies

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Abstract

This paper analyzes informational aspects linked with foreign direct investment in economies that just open up to foreign investors and steer towards a market economy. From the viewpoint of foreign firms, such economies are still terra incognita as far as economic and practical conditions for setting up foreign direct investment are concerned. The best way to obtain relevant information is via the experiences from other investment projects. In this situation waiting may be advantageous for the firms, given that sunk costs have to be incurred in connection with investment and the investment decision can be postponed. However, since every investor provides a positive informational externality, this waiting is harmful for the investment process and for the economies themselves. Economic policies to correct the externality problem may thus be justified.

JEL Classification: F21, P21, O23

Suggested Citation

Thimann, Christian and Thum, Marcel P., Investing in Terra Incognita: Waiting and Learning. Available at SSRN: https://ssrn.com/abstract=76330 or http://dx.doi.org/10.2139/ssrn.76330

Christian Thimann

AXA Group ( email )

25 avenue Matignon
Paris, 75008
France

Marcel Thum (Contact Author)

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

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

Poschinger Str. 5
Munich, 01069
Germany

Institute for Corruption Studies

Stevenson Hall 425
Normal, IL 61790-4200
United States

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