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Journal of International Economics
ISSN : 0022-1996

Risk and the technology content of FDI: A dynamic model


Pao-Li Changa | School of Economics, Singapore Management University
Chia-Hui Lu | Department of Economics and Finance, City University of Hong Kong

Vol.86 No.2 , pp.306 ~ 317


This paper incorporates risk into the FDI decisions of firms. The risk of FDI failure increases with the gap between the South's technology frontier and the technology complexity of a firm's product. This leads to a double-crossing sorting pattern of FDI?firms of intermediate technology levels are more likely than others to undertake FDI. It is with the attempt to relax the upper bound of the technology content of FDI, we argue, that many FDI policies are created. The theory's predictions are consistent with the empirical patterns of FDI in China by US and Taiwanese manufacturing firms.


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