FDI commitments increase when uncertainty is resolved: Evidence from Asia

Abigail Hornstein and Kanda Naknoi

Journal of Asian Economics, 2023, vol. 87, issue C

Abstract: How do foreign investors deviate from plans in response to new information? Prior literature shows that how utilized foreign direct investment (FDI) is affected by uncertainty depends on the type of FDI. We examine how utilized FDI differs from planned investments by studying the commitment ratio, defined as the ratio of the two FDI flows, in the context of China, Indonesia, the Philippines and Thailand over 1996–2013. First, we find that the commitment ratio exceeds 1 in China and Indonesia but is lower than 1 in the Philippines and Thailand. Second, we find a higher commitment ratio, which means investments are likely to be a larger fraction of what was proposed, when economic uncertainty regarding the destination country is reduced after a project is proposed and the destination environment is politically stable and financially open.

Keywords: Commitment; Foreign direct investment; Exchange rate volatility; Openness; Institutions (search for similar items in EconPapers)
JEL-codes: F21 F23 G18 G31 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:87:y:2023:i:c:s1049007823000490

DOI: 10.1016/j.asieco.2023.101629

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