Country Risks and the Investment Activity of U.S. Multinationals in Developing Countries
October 1, 1999
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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.
Subject: Balance of payments, Capital formation, Capital spending, Economic sectors, Expenditure, Exports, Foreign direct investment, International trade, Manufacturing, National accounts
Keywords: affiliate investment, Capital formation, Capital spending, economic risk, Exports, Foreign direct investment, Foreign investment, further investment liberalisation, investment activity, investment agreement, investment decision, investment liberalization, investment opportunity, investment protection, investment regime, investment stock, investment under uncertainty, Manufacturing, WP
Pages:
27
Volume:
1999
DOI:
Issue:
133
Series:
Working Paper No. 1999/133
Stock No:
WPIEA1331999
ISBN:
9781451855470
ISSN:
1018-5941
