Learning from foreign investment by rival firms: Theory and evidence
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We offer an alternative explanation for follow-the-leader behavior in foreign investment decisions based on Bayesian learning by rival firms. We test the implications of the model through a panel count data sample of MNEs that have invested in Central and Eastern Europe over the period 1990–1997. Interacting the measure of rivals' investment in country-industry pairs with uncertainty, we are able to identify the channel of Bayesian learning about revenue postulated by the model as the only one consistently generating the detected follow-the-leader behavior of foreign investments. The empirical findings are robust with respect to different model specifications.
- C25 : Discrete Regression and Qualitative Choice Models; Discrete Regressors
- L10 : Market Structure, Firm Strategy, and Market Performance: General
- F21 : International Investment; Long-Term Capital Movements
- D81 : Criteria for Decision-Making under Risk and Uncertainty