The Usefulness of Private and Public Information for Foreign Investment Decisions

Information on operating conditions based on direct experience in a country is likely to be the information most credible to foreign investors. But for investors new to a country, information inferred from observing others investing in that country may be more influential - and may lead to cascading investments in that country, as happened in China and Vietnam. Countries that do not draw a critical mass of investors are in danger of being bypassed by investors. Using a specially designed survey of Japanese firms planning investments in Asia, Kinoshita and Mody emphasize the importance of privately held information in making foreign investment decisions. Information on operating conditions based on direct experience in a country is likely to be the most credible information, but for investors new to a country, information inferred from observing others investing in that country may be more influential. Initially, in fact, observing the actions of competitors seems to lead to cascading investments in that country, apparently through herd behavior (as in China and Vietnam). Countries which do not draw a critical mass of investors are in danger of being bypassed for significant periods. Publicly available information is important in helping shape average perceptions about a country, leading potential investors to view particular locations favorably. Privately held information complements that public information, and accounts for important variations in investment plans. Subjective perceptions about policy on foreign direct investment are also important. Policy designed to attract investors - for example, special zones for foreign investors - have been successful in many instances, especially in East Asia, but have also been a waste of scarce investment resources when not appropriately planned. And such policy is of little value in attracting those already inves...