hero working papers

Oligopolistic Reaction to Foreign Investment in Discrete Choice Panel Data Models

Number: 243
Year: 2003
Author(s): Carlo Altomonte (Università Bocconi and KU Leuven)and Enrico Pennings (Università Bocconi and IGIER)
We offer a simple explanation for oligopolistic reaction based on Bayesian learning by
rival firms operating in an uncertain environment. We test the implications of the model
through a discrete choice panel data sample of MNEs that have invested in Central and
Eastern Europe over the period 1990-1997. Interacting the measure of rivals investment
in country-industry pairs with uncertainty we find strong evidence for oligopolistic reaction,
especially through the channel of Bayesian learning postulated by the model. The
findings are robust with respect to different model specifications.

Keywords: discrete choice panel data, uncertainty, FDI, oligopolistic reaction
JEL codes: C25; D81; F21; L10