Incentives for foreign direct investment under imitation

Ping LIN, Kamal SAGGI

Research output: Journal PublicationsJournal Article (refereed)

20 Citations (Scopus)

Abstract

We study the symmetric mixed strategy equilibrium of a dynamic model where at each instant two exporting firms choose their probability of foreign direct investment (FDI). The first firm's FDI generates cost-lowering spillovers for the second and leads to local imitation, thereby intensifying competition. While an increase in imitation risk usually makes FDI less likely, there exist parameter values for which the converse holds. The key point is that by delaying the second firm's switch to FDI, an increase in imitation risk can increase the value of being first to invest, thereby increasing the equilibrium probability of FDI.
Original languageEnglish
Pages (from-to)1275-1298
Number of pages24
JournalCanadian Journal of Economics
Volume32
Issue number5
DOIs
Publication statusPublished - 1 Jan 1999

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