Country Risks and the Investment Activity of U.S. Multinationals in Developing Countries

Author/Editor:

Alexander Lehmann

Publication Date:

October 1, 1999

Electronic Access:

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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 develops a simple real options model that demonstrates the role of country-specific risk and sunk costs in determining a multinational’s choice between exports and foreign investment. The hypotheses from the model are tested for the distribution of capital expenditures by U.S.-owned foreign affiliates in 29 developing countries during 1984–95. Political and economic risk ratings are identified as deterrents to foreign capital formation; scale economies, unit wage differentials, trade openness, and agglomeration effects are found to be stimulating. These findings provide an additional rationale for a multilateral investment agreement that could function as an agency of restraint.

Series:

Working Paper No. 99/133

English

Publication Date:

October 1, 1999

ISBN/ISSN:

9781451855470/1018-5941

Stock No:

WPIEA1331999

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

27

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