Uncertainty and sequential outward foreign direct investment

This paper studies firms’ choice of sequential outward foreign direct investment (OFDI) under uncertainty. Using an illustrative theoretical model where an investor chooses an irreversible OFDI project that maximizes the returns over finite investment periods, we demonstrate that, due to uncertainty, sequential OFDI that accumulates experiential information is advantageous over other types of OFDI in optimizing investment decision. Using Chinese firm-level data and various regression specifications, we find that Chinese firms are more likely to carry out sequential OFDI when the level of uncertainty is high. Macroeconomic uncertainty and investment risk in host countries are found to associate with higher probability of sequential OFDI. Chinese government support policies make firms rely less on sequential OFDI to deal with investment risk. Analyses on different firm types, namely state-owned enterprises (SOEs), foreign invested enterprises (FIEs), and private enterprises (PVEs), each of which has different sensitivity toward investment uncertainty, suggest that more risk-sensitive firm type weighs more on uncertainty, and therefore is prone to choose sequential OFDI. Our results are robust to various definitions of sequential OFDI.