SEQUENTIAL FOREIGN DIRECT INVESTMENT UNDER INFORMATION ASYMMETRY: LESSONS FROM KOREAN COMPANIES' OUTWARD FDIS TO CHINA

Abstract

Only few works on the strategic role of sequential investment and its contribution to the parent company's performance are available in the literature. Regarding sequential investments as conditional events subsequent to a successful initial investment, a game-theoretic outward FDI (Foreign Direct Investment) model is constructed. It demonstrates that the adverse selection problem that originates from information asymmetry between the parent company and its subsidiary is embedded in outward FDIs. A conditional information update on the types of sequential investment through ceaseless monitoring efforts is required to make outward FDIs fruitful. Pooling LSDV (least squares dummy variable) regression supports the prediction of the developed model; Korean parent companies begin to pursue more sequential investments in China as their monitoring capabilities are enhanced. From the perspective of the intervals between an initial investment and sequential investments, those sequential investments occurring within four years ex post initial investments enlarge assets of parent companies, but those occurring later help to expand parent companies sales. Functionally, the sequential investments pursued by either green field investments or joint ventures contribute more to the size expansion of Korean parent companies compared to those pursued by mergers and acquisitions.