The Value of Waiting: Foreign Direct Investment with Uncertainty and Imperfect Local Knowledge

Yongil Jeon, Taekwon Kim and Stephen Miller
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Yongil Jeon: Central Michigan University
Taekwon Kim: Yonsei University

No 2004-44, Working papers from University of Connecticut, Department of Economics

Abstract: This paper examines the role of uncertainty and imperfect local knowledge in foreign direct investment. The main idea comes from the literature on investment under uncertainty, such as Pindyck (1991) and Dixit and Pindyck (1994). We empirically test .the value of waiting. with a dataset on foreign direct investment (FDI). Many factors (e.g., political and economic regulations) as well as uncertainty and the risks due to imperfect local knowledge, determine the attractiveness of FDI. The uncertainty and irreversibility of FDI links the time interval between permission and actual execution of such FDI with explanatory variables, including information on foreign (home) countries and domestic industries. Common factors, such as regulatory change and external shocks, may affect the uncertainty when foreign investors make irreversible FDI decisions. We derive testable hypotheses from models of investment under uncertainty to determine those possible factors that induce delays in FDI, using Korean data over 1962 to 2001.

Keywords: Foreign Direct Investment; Irreversibility; Uncertainty; Imperfect information; Investment Delay (search for similar items in EconPapers)
JEL-codes: F21 G31 O16 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2004-07
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (1)

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