Informational Aspects of Foreign Direct Investment and the Multinational Firm

This paper explores the informational role of plant location decisions for the multinational enterprise. When information about costs is incomplete, the location of a plant will be chosen not only for its impact on actual production costs, but also for its impact on the perception of costs as held by foreign rivals. We show that the desire to transmit cost information can itself give rise to the multinational firm, and characterize the country-specific and firm-specific attributes that are most likely to yield such multinational activity. Hence, the informational role of plant location decisions is a potentially important element in understanding the behavior of the multinational firm.