Abstract
This paper examines role of uncertainty and imperfect local knowledge in foreign direct investment. The main idea comes from 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 risks due to imperfect local knowledge, determine attractiveness of FDI. The uncertainty and irreversibility of FDI links 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 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.
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