Essays on uncertainty and foreign direct investments

Authors: Koné, Mankan M.
Advisor: Gaigné, CarlTamini, Lota Dabio
Abstract: The three essays of this thesis explore the impact of uncertainty on FDI in the food industry by taking into account the specificities of the food value chain. FDI flows and stocks are very unstable and evidence suggests that uncertainty is the main factor causing frequent declines in FDI globally. We want to know whether and to what extent the uncertainty caused by the volatility of demand and supply affects FDI in the food processing industry by using theoretical and empirical models. The first essay empirically studies whether uncertainty related to variables such as volatile market demand, production variability and trade volatility affects the hazard rate of FDI in the food industry. As FDI is irreversible investment, it is likely to be delayed when uncertainty increases. Using a survival analysis model and bilateral FDI data, we find that volatility reduces the hazard rate of FDI. This behavior is observed in the food industry but also in other industries. However, not all sources of variability are relevant. For example, FDI by European and US multinational companies in the food industry is negatively affected by the import volatility of the country of destination. FDI of these countries in the chemical industry is negatively affected by the volatility of production. Export volatility plays a role in attracting foreign capitals in the transport equipment sector of host countries. The second essay provides a theoretical model to explain the choice between export and FDI given the uncertainty about the size of demand. The fact that FDI is delayed when uncertainty increases is explained by the wait-and-see behavior of multinational companies when investing in very uncertain foreign markets. FDI decisions can be considered as real options in which the decision to invest can be postponed to reduce uncertainty. We build a model that relies on the literature of real options. In addition to the uncertainty of demand, we also examine factors such as trade costs and the competitive environment. We find that intense competition, low product differentiation and reduction of trade barriers amplify the wait-and-see behavior of multinational firms. For example, trade liberalization can be harmful for FDI, as it increases the sensitivity of FDI to uncertainty and waiting becomes a more valuable option. In the last essay, we analyze FDI in the food processing industry, given the differences in the volatility of agricultural supply between countries. This analysis allow us to examine the issue of uncertainty in the food processing industry from a supply chain perspective, as we consider uncertainty in the upstream sector. In fact, variations of farm prices or of quantity delivered to processors by farmers are problematic as they are large and unpredictable. Consequently, food processing firms, as they use massively primary agricultural commodities as ingredients, are exposed to an increasing and persistent uncertainty. Our theoretical framework takes into account the market power of processors and horizontal and vertical FDI are discussed. We find that even risk-neutral companies are concerned by the variance of supply. Indeed, in the context of the food industry, the relationship between profit and supply shock is concave given imperfect competition and the timing of the resolution of uncertainty. Our empirical approach (a gravity model) confirms that multinational firms achieve their FDI decisions by considering the difference of supply shocks between countries as the volatility of the agricultural sector deters FDI.We test this prediction using bilateral FDI stocks data in the food processing industry.
Document Type: Thèse de doctorat
Issue Date: 2018
Open Access Date: 21 October 2019
Grantor: Université Laval
Collection:Thèses et mémoires

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