Behavioural influences in Portuguese foreign direct investment

The paper presents a behavioural economics approach to FDI. It relies on questionnaires and interviews with Portuguese managers to present evidence of the role played by herding, anchoring, mental accounting and other behavioural rules in FDI location decisions. It originates a set of heuristics influencing the direction of FDI flows and it confirms the prediction of the Heiner, 1983 and Heiner, 1989 that the higher the uncertainty faced by decision makers the more frequent will be the use of behavioural rules. The results go beyond neoclassical theory by helping to explain non-maximizing decision-making by managers.

Research highlights▶ Strengthening of the economic analysis based on the findings of the empirical work. First, to explicitly expose and underline the deviations from neoclassical economic rationality in the choice of the place to invest and in the sequential decisions to keep investments operating. Second, to signal the influence of behavioural rules in the direction of FDI flows. The use of behavioural rules is due to the uncertainty in the decision making process. The resulting apparent reduction in uncertainty leads managers to overestimate the outcome of FDI in certain locations in comparison with alternative ones. Thus, the influence of heuristics explain why managers make sub-optimal decisions by channelling FDI flows to locations perceived as being more profitable. This decision making process goes beyond the predictions of the neoclassical model because it prevents maximizing behaviour. ▶ Empirical validation of the prediction that the higher the uncertainty faced by decision makers the more frequent will be the use of behavioural rules (Heiner model). ▶ The discussion of how representative is the sample. The use of behavioural rules in decision making processes is well established in financial markets and in some FDI operations (e.g., Kinoshita and Mody, 2001). The characteristics of Portuguese firms are similar to those of other European countries with similar institutions. Therefore, there are no obvious reasons to consider that the behavioural rules identified in the paper are specific to Portuguese managers and firms.