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ERC WORKING PAPERS

Foreign Direct Investment as a Signal

Onur A. Koska, Ngo Van Long and Frank Stähler

Abstract:
This paper models competition among multinational firms in an environment of firm heterogeneity, incomplete cost information and strategic interaction. In this context, FDI serves as a signal of productivity: when firms sort into exporters and multinationals, they also show whether they have low or high productivity. We show that the signaling effect of FDI increases the FDI incentive as firms would like to avoid sending a low productivity signal.

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2016

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