Strategic Foreign Direct Investment in Developing Countries under Demand Uncertainty: Commitment vs. Flexibility

Abstract

The paper analyzes the effect of expected future demand on the investment decisions of multinational enterprises. In particular, I explore the issue of the timing of switching between exporting and FDI in the host developing country and explicitly incorporate the firm’s attitude toward risk in the model. The model demonstrates that the optimal time for switching to FDI depends on the expected future demand and the degree of its uncertainty.

Keywords

• Foreign Direct Investment
• Developing Countries
• Uncertainty
• Switching Time
• Commitment
• Flexibility