Work

Correlation aversion in foreign direct investment

Year: 2025

Type: article

Abstract: Decisions under risk are often multidimensional , where the preferences of the investor depend on several factors. Investment theory implies that in the presence of different shocks, the correlation between these shocks is important. This study analyzes the relationship between the correlation of two shocks and foreign direct investment (FDI). The sources of shocks, in this study, are related to demand and exchange rate in the destination market. Constructing large panel data on industry-level FDI, we analyze FDI under correlation risk. We show that in the presence of two shocks, industry-level FDI flows exhibit correlation aversion and that the correlation of two distinct shocks explains significant variation in geographic allocation of FDI at the industry-level.

Source: Finance research letters

DOI: 10.1016/j.frl.2024.106728

Authors: Navruz Khotamov, Naoto Jinji

Institutions: Hitotsubashi University, Kyoto University

Language: English

Topic: International Business and FDI

Subfield: Strategy and Management

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,730

Funder: Japan Society for the Promotion of Science