Incentives for foreign direct investment under imitation

We study the symmetric mixed strategy equilibrium of a dynamic model where at each instant two exporting firms choose their probability of foreign dir ect investment (FDI). The first firm's FDI generates cost-lowering spillove rs for the second and leads to local imitation, thereby intensifying compet ition. While an increase in imitation risk usually makes FDI less likely, t here exist parameter values for which the converse holds. The key point is that by delaying the second firm's switch to FDI, an increase in imitation risk can increase the value of being first to invest, thereby increasing th e equilibrium probability of FDI.