Foreign direct investment and the correlation between cost and revenue

Avner Bar-Ilan, Ivan Borodko

Research output: Contribution to journalArticlepeer-review


This paper studies irreversible investment in the presence of uncertain revenue and uncertain cost of production. Using methodology of real options, we find the threshold markup of price over cost that triggers investment. When the processes for revenue and cost are negatively correlated, the standard result that uncertainty delays investment always holds. However, when these two processes are positively correlated, greater uncertainty of revenue or cost might accelerate investment. As less correlated cost and revenue, vertical FDI is less desirable than producing at home, but horizontal FDI that brings production to the output market is an advantage.

Original languageEnglish
Pages (from-to)1252-1267
Number of pages16
JournalReview of International Economics
Issue number4
StatePublished - 2019

Bibliographical note

Publisher Copyright:
© 2019 John Wiley & Sons Ltd

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Development


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