Global JavaScript Variable Scope: Why doesn’t this work?

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What is happening in your first example is the declaration and initlization of msg are being split with the declaration being hoisted to the top of the closure.

var msg; //declaration
msg = "inside" //initialization

Therefore the code you wrote is the same thing as

var msg = 'outside';

function foo() {
var msg;  
alert(msg); // undefined
msg = 'inside';
alert(msg); // inside
}

The second example is not the same. In your second example you have not declared a local variable msg so alert(msg) refers to the global msg.
Here is some further reading on:
Hoisting

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