Foreign direct investment as a signal


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Koska O. A. , Ngo Van Long N. V. L. , Staehler F.

REVIEW OF INTERNATIONAL ECONOMICS, vol.26, no.1, pp.60-83, 2018 (SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 26 Issue: 1
  • Publication Date: 2018
  • Doi Number: 10.1111/roie.12303
  • Journal Name: REVIEW OF INTERNATIONAL ECONOMICS
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus
  • Page Numbers: pp.60-83
  • Middle East Technical University Affiliated: No

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.