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FDI commitments increase when uncertainty is resolved: Evidence from Asia

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  • Hornstein, Abigail S.
  • Naknoi, Kanda

Abstract

How do foreign investors deviate from plans in response to new information? Prior literature shows that how utilized foreign direct investment (FDI) is affected by uncertainty depends on the type of FDI. We examine how utilized FDI differs from planned investments by studying the commitment ratio, defined as the ratio of the two FDI flows, in the context of China, Indonesia, the Philippines and Thailand over 1996–2013. First, we find that the commitment ratio exceeds 1 in China and Indonesia but is lower than 1 in the Philippines and Thailand. Second, we find a higher commitment ratio, which means investments are likely to be a larger fraction of what was proposed, when economic uncertainty regarding the destination country is reduced after a project is proposed and the destination environment is politically stable and financially open.

Suggested Citation

  • Hornstein, Abigail S. & Naknoi, Kanda, 2023. "FDI commitments increase when uncertainty is resolved: Evidence from Asia," Journal of Asian Economics, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:asieco:v:87:y:2023:i:c:s1049007823000490
    DOI: 10.1016/j.asieco.2023.101629
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    More about this item

    Keywords

    Commitment; Foreign direct investment; Exchange rate volatility; Openness; Institutions;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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