The Optimal Timing of a Foreign Direct Investment

Abstract

Analyses of the optimal timing of foreign direct investment (FDI) decisions have been curiously lacking in the general literature on multinational enterprises (cf. Buckley (1979a, b)). Although comparative static analyses exist, comparing exporting to the host country with market servicing from a production unit sited in the host country (Horst, 1971; Hirsh, 1976), the only attempt to predict the timing of the switch from exporting to foreign-based production is that of Aliber (1970) (although Vernon (1966) gives a cost-based rationale for the switch). This chapter attempts to fill this gap in the theory of FDI. Section 2.1 outlines and criticises previous attempts to deal with the problem, sections 2.2-4 present a simple model, which ignores set-up costs, and sections 2.5 and 2.6 give a more detailed analysis including such costs. Further extensions of the theory are considered in section 2.7, and the conclusions are summarised in section 2.8. The problem emerges as being more complex than had previously been appreciated.