Learning from foreign investment by rival firms: Theory and evidence
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.
|Keywords||Bayesian learning, FDI, discrete choice panel data, uncertainty|
|JEL||Discrete Regression and Qualitative Choice Models; Discrete Regressors (jel C25), Criteria for Decision-Making under Risk and Uncertainty (jel D81), International Investment; Long-Term Capital Movements (jel F21), Market Structure, Firm Strategy, and Market Performance: General (jel L10)|
|Persistent URL||dx.doi.org/10.1016/j.ijindorg.2007.12.002, hdl.handle.net/1765/13557|
|Series||ERIM Top-Core Articles|
|Journal||International Journal of Industrial Organization|
Altomonte, C, & Pennings, H.P.G. (2008). Learning from foreign investment by rival firms: Theory and evidence. International Journal of Industrial Organization, 26(5), 1203–1217. doi:10.1016/j.ijindorg.2007.12.002