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FDI and FPI - Strategic Complements?
We show in a dynamic investment setting whether firms choose FDI or international portfolio investment (FPI) in the presence of stochastic productivity taking into account di¤erences in flexibility of both invest- ments. Isolated FPI and FDI investments are compared to combined FPI and FDI inves...
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| Publié dans: | MAGKS - Joint Discussion Paper Series in Economics (Band 12-2008) |
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| Auteur principal: | |
| Format: | Arbeit |
| Langue: | anglais |
| Publié: |
Philipps-Universität Marburg
2008
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| Sujets: | |
| Accès en ligne: | Texte intégral en PDF |
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| Résumé: | We show in a dynamic investment setting whether firms choose FDI
or international portfolio investment (FPI) in the presence of stochastic
productivity taking into account di¤erences in flexibility of both invest-
ments. Isolated FPI and FDI investments are compared to combined FPI
and FDI investments. FDI requires higher investment specific costs than
FPI. Thus, it is not possible to adjust FDI to environmental changes every
period. In contrast, FPI bears lower fixed costs and can be adjusted im-
mediately to short-term changes in the environment. Additionally, as a
result of the investors control position FDI yields a higher return than
FPI. Hence, there is a trade-off between flexibility and higher return for
firms deciding between FDI and FPI.We explore whether as a consequence
of higher investment specific fixed costs and lower flexibility in the case
of FDI, small firms prefer FPI and larger firms invest in FDI. We show
that a combined strategy dominates the isolated strategy always in times.
Further, combined international investment comprises a higher incentive
for firms to invest in r&d-investment and consequently firm productivity
increase faster than with isolated international investment. Depending on
the success-probability and the correlation between the various investment
possibilities, even small firms (low productivity) invest in FDI. |
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| ISSN: | 1867-3678 |
| DOI: | 10.17192/es2023.0199 |