The decision about where to invest abroad is influenced by behavioral factors. Explain the behavioral approach to FDI

What will be an ideal response?

Answer: The behavioral approach to analyzing the FDI decision is typified by the so-called Swedish School of economists. The Swedish School has rather successfully explained not just the initial decision to invest abroad, but also later decisions to reinvest elsewhere, and to change the structure of a firm's international involvement over time. Based on the internationalization process of a sample of Swedish MNEs, the economists observed that these firms tended to invest first in countries that were not too far distant in psychic terms. Close psychic distance defined countries with a cultural, legal, and institutional environment similar to Sweden's, such as Norway, Denmark, Finland, Germany, and the United Kingdom. The initial investments were modest in size, to minimize the risk of an uncertain foreign environment. As the Swedish firms learned from their initial investments, they became willing to take greater risks with respect to both the psychic distance of the countries, and the size of the investments.