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The timing and the probability of FDI: an application to the US multinational enterprises

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  • de Brito, José Brandão

    ()
    (Banco de Portugal)

  • de Mello Sampayo, Felipa

    (Instituto Superior D. Afonso III - INUAF)

Abstract

An 'option-pricing' model is employed to analyse when a firm should expand its production capabilities abroad. In a framework where the firm's profits are determined by some average of the attractiveness of the home and foreign countries, and attractiveness in each country follows differentiated Brownian motions, this paper derives an optimal trigger value for FDI. The model shows that, contrary to the NPV rule, FDI entry should be optimally delayed the greater the uncertainty surrounding the future path of attractiveness in both locations. The second part of the paper is devoted to empirically test the results of the model. Drawing on data of FDI from the US into a panel of developed and developing countries and using labour costs as a proxy for (the reciprocal of) attractiveness, our estimation overwhelmingly confirms the results of the model, namely that FDI entry events are negatively related to the uncertainty surrounding attractiveness.

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Bibliographic Info

Paper provided by International Conferences on Panel Data in its series 10th International Conference on Panel Data, Berlin, July 5-6, 2002 with number A3-4.

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Date of creation: Jun 2002
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Handle: RePEc:cpd:pd2002:a3-4

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Keywords: Foreign Direct Investment; Multinational Enterprises; Option-Pricing Model; Ordered Probit Model for Panel Data.;

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Cited by:
  1. de Mello-Sampayo, Felipa & de Sousa-Vale, Sofia & Camões, Francisco, 2010. "Delaying the timing of offshoring low-skilled tasks," Economic Modelling, Elsevier, vol. 27(5), pages 951-958, September.
  2. Henning M�hlen & Peter Nunnenkamp, 2011. "FDI by early movers, followers and latecomers: timing of entry by German firms during transition in the Czech Republic," Applied Economics Letters, Taylor & Francis Journals, vol. 18(18), pages 1729-1734, December.

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