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Foreign direct investment as a signal
Author(s) -
Koska Onur A.,
Van Long Ngo,
Stähler Frank
Publication year - 2018
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12303
Subject(s) - multinational corporation , foreign direct investment , productivity , competition (biology) , oligopoly , economics , investment (military) , industrial organization , complete information , microeconomics , international economics , monetary economics , cournot competition , macroeconomics , finance , ecology , politics , political science , law , biology
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.