Exporting versus Foreign Direct Investment: Learning Through Propinquity
32 Pages Posted: 18 May 2006 Last revised: 26 May 2012
Date Written: May 2012
This paper considers the role learning has on foreign direct investments (FDI) when there is both cost and demand uncertainty. FDI has an obvious benefit as it gains the firm information about local demand and costs. However, FDI has a second effect: it correlates the firm's cost with the local rival's cost, which proves harmful in both price and quantity competition. Thus, the choice depends on whether the firm faces relatively more demand or cost uncertainty, to what extent inputs are locally procured and how differentiated the rival's product is.
Keywords: information, FDI, joint ventures
JEL Classification: D8, F1, F2
Suggested Citation: Suggested Citation