Three essays on foreign direct investment

This dissertation consists of three essays. The first paper provides a model to investigate the effect of foreign exchange rate risk on a firm's foreign market operation mode--export or foreign direct investment (FDI)--selection. The introduction of exchange risk will change the relative outcomes of the two strategies. If the principal of the FDI is financed locally, increasing exchange risk will always improve relative profitability of FDI. If it is financed internationally, then the change may favor export profitability. Generally, increasing exchange risk encourages FDI activity relative to export. The degree of exchange rate risk which eventually causes a firm to switch its strategy from export to FDI depends on its relative value to the fixed cost of FDI.; The second paper provides a model which combines optimal growth, capital movement and technology transfer in one setting to analyze a developing country's optimal capital inflow decision. Three issues are examined: (1) the optimal quantity of capital inflow, (2) the optimal type (borrowing or FDI) of capital inflow, and (3) the optimal response to those exogenous shocks. The optimal quantity of capital inflow is positively related to the developing country's domestic capital accumulation. In the choice of optimal type, the technological externality a specific type brings plays a big role. When there is an exogenous shock, the optimal response to it is not necessarily limited to within-type adjustment, but also could include a switch in the nature of the capital inflow.; The third paper examines how the equilibrium market structure (export or FDI) is determined, and the effect of different trade policy regimes (specific and ad valorem tariffs) on its determination. In the specific tariff regime, this paper finds that strategic competition generates a market structure equilibrium with unconventional results for some combinations of fixed cost and tariff values. A higher tariff may induce a shift to export equilibrium while a higher FDI fixed cost may induce a shift to FDI activity. Domestic firms may divert foreign entry from one strategy to another. In the ad valorem tariff regime although higher FDI cost may still induce a shift to FDI equilibrium, the similar property doesn't exist for tariffs.