Uncertainity in Fdi

Uncertainty and foreign direct investment: the role of moderators

M. Krishna Erramilli and Derrick E. D’Souza

University of North Texas, Denton, Texas, USA

Introduction Considerable research has been undertaken to explain why firms serve foreign markets through foreign direct investment (FDI) in preference to exporting and licensing. Many determinants of FDI – spanning host country, product, industry and firm characteristics – have been investigated. Of these, uncertainty occupies a position of pre-eminence. In the international business literature, uncertainty is categorized as internal uncertainty, caused primarily by the firm’s lack of knowledge of host markets (due to the dearth of international experience or entry into culturally unfamiliar host markets), and external uncertainty, resulting from volatility in the host markets (Anderson and Gatignon, 1986). This internal-external dichotomy is consistent with the broader strategic management perspective put forth recently by Miller (1992) that uncertainty can arise from inadequacy of information on certain variables or from the unpredictability of the environment. As described below, researchers have generally maintained that firms reduce resource commitments in the face of growing uncertainty. In turn, reduction in resource commitments would favour non-FDI modes over FDI modes. But, it is not clear whether the strength of the relationship between uncertainty and choice of FDI remains constant in all situations. There is growing evidence that firms may not respond to uncertainty with equal intensity in all situations. Recent research (Erramilli and Rao, 1993; Sharma and Johanson, 1987) has shown that firms may not respond at all to uncertainty in some situations (e.g., when capital intensity is low), and may do so with unusual vigour in others (e.g., when capital intensity is high). This in turn suggests that the effects of uncertainty on FDI may be moderated by other factors. Yet, there has been little...