The Effect of Capital Controlson Foreign Direct Investment Decisions Under Country Risk with Intangible Assets

April 1, 2007

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Format: Chicago

Kinga Z Elo. The Effect of Capital Controlson Foreign Direct Investment Decisions Under Country Risk with Intangible Assets, (USA: International Monetary Fund, 2007) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines how capital controls affect FDI decisions and how the impact of these restrictive measures varies with different levels of country risk. We construct a model of firms' FDI decisions, broadly in Dunning's "eclectic theory" framework, using "real options" to emphasize economic uncertainty and country risk. Numerical results of the model take the form of "quality statistics" that uncover the underlying dynamics hidden in the aggregate data that is responsible for the low performance of recent empirical studies. We find that increasing levels of capital controls reduce the life-span of FDI investments at each level of country risk and foreign investors' willingness towards risk sharing increases. We reveal a significant interaction between capital control and country risk, resulting in a nonlinear relationship between these and the volatility and volume statistics. We estimate a standard cross-sectional model that provides strong support for our theoretical findings.

Subject: Balance of payments, Business environment, Capital controls, Capital flows, Economic sectors, Foreign corporations, Foreign direct investment

Keywords: Business environment, Capital control, Capital controls, Capital flows, Country risk, Country risk parameter, Decision model, Decision problem, Decisions under uncertainty, FDI decision, FDI flow, FDI investment, FDI project, FDI volatility, Fixed cost, Foreign corporations, Foreign direct investment, Foreign direct investments, GDP equation, Global, Macro FDI datum, Transaction costs, WP

Publication Details

Pages:

62
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/079
Stock No:

WPIEA2007079
ISBN:

9781451866438
ISSN:

1018-5941

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