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A note on political risk and the required return on foreign direct investment

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  • Kirt C Butler

    (Michigan State University)

  • Domingo Castelo Joaquin

    (Illinois State University)

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    Abstract

    This note analyzes the impact of political risk on investors' required return and the multinational corporation's cost of capital on foreign direct investment using the basic diversifiable-nondiversifiable dichotomy of portfolio theory. Whether or not a particular political risk affects the value of a multinational corporation through its cost of capital depends on whether the risk is related to investors' relevant market portfolios. We provide a numerical example that illustrates the potential impact of political risk on required return.© 1998 JIBS. Journal of International Business Studies (1998) 29, 599–607

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal Journal of International Business Studies.

    Volume (Year): 29 (1998)
    Issue (Month): 3 (September)
    Pages: 599-607

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    Handle: RePEc:pal:jintbs:v:29:y:1998:i:3:p:599-607

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    Cited by:
    1. Busse, Matthias & Hefeker, Carsten, 2007. "Political risk, institutions and foreign direct investment," European Journal of Political Economy, Elsevier, vol. 23(2), pages 397-415, June.
    2. Geert Bekaert & Campbell R. Harvey & Christian T. Lundblad & Stephan Siegel, 2014. "Political Risk Spreads," NBER Working Papers 19786, National Bureau of Economic Research, Inc.
    3. Kashlak, Roger, 1998. "Establishing financial targets for joint ventures in emerging countries: A conceptual model," Journal of International Management, Elsevier, vol. 4(3), pages 241-258, November.
    4. Treviño, Len J. & Mixon, Franklin G., 2004. "Strategic factors affecting foreign direct investment decisions by multi-national enterprises in Latin America," Journal of World Business, Elsevier, vol. 39(3), pages 233-243, August.
    5. Carl B.McGowan, Jr. & Susan E. Moeller, 2009. "A Model for Making Foreign Direct Investment Decisions Using Real Variables for Political and Economic Risk Analysis," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 7(1), pages 27-44.
    6. Panagiotis Liargovas & Konstantinos Skandalis, 2012. "Foreign Direct Investment and Trade Openness: The Case of Developing Economies," Social Indicators Research, Springer, vol. 106(2), pages 323-331, April.
    7. Lüthi, Sonja & Prässler, Thomas, 2011. "Analyzing policy support instruments and regulatory risk factors for wind energy deployment--A developers' perspective," Energy Policy, Elsevier, vol. 39(9), pages 4876-4892, September.
    8. Li, Shaomin & Filer, Larry, 2007. "The effects of the governance environment on the choice of investment mode and the strategic implications," Journal of World Business, Elsevier, vol. 42(1), pages 80-98, March.
    9. Beaulieu, Marie-claude & Cosset, Jean-Claude & Essaddam, Naceur, 2002. "The Impact of Political Risk on the Volatility of Stock Returns: the Case of Canada," Cahiers de recherche 0208, CIRPEE.
    10. Pierre-Guillaume Méon & Khalid Sekkat, 2007. "Revisiting the relationship between governance and foreign direct investment," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 50(1), pages 41-61.
    11. Colm Kearney & Frank Barry, 2005. "MNEs and Industrial Structure in Host Countries:A Mean Variance Analysis of Ireland’s Manufacturing Sector," The Institute for International Integration Studies Discussion Paper Series iiisdp023, IIIS.

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