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Expropriation and control rights: A dynamic model of foreign direct investment

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  • Schnitzer, Monika

Abstract

This paper studies the strategic interaction between a foreign direct investor and a host country. We analyse how the investor can use his control rights to protect his investment, if he faces the risk of ‘creeping expropriation’ once his investment is sunk. It is shown that this hold-up problem may cause underinvestment, if the outside option of the investor is too weak, and overinvestment if it is too strong. We also analyse the impact of spillover effects, give a rationale for ‘tax holidays’ and examine how stochastic returns affect the strategic interaction of investor and host country.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 17 (1999)
Issue (Month): 8 (November)
Pages: 1113-1137

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Handle: RePEc:eee:indorg:v:17:y:1999:i:8:p:1113-1137

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Web page: http://www.elsevier.com/locate/inca/505551

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  1. Thomas, J. & Worral, T., 1991. "Foreign Direcyt Investment and the Risk of Expropriation," Papers 9126, Tilburg - Center for Economic Research.
  2. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  3. Nöldeke, Georg & Schmidt, Klaus M., 1997. "Sequential Investments and Options to Own," CEPR Discussion Papers 1645, C.E.P.R. Discussion Papers.
  4. Chris Doyle & Sweder Wijnbergen, 1994. "Taxation of foreign multinationals: A sequential bargaining approach to tax holidays," International Tax and Public Finance, Springer, vol. 1(3), pages 211-225, October.
  5. Grossman, Sanford J. & Hart, Oliver D., 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Scholarly Articles 3450060, Harvard University Department of Economics.
  6. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-26, September.
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