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

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Author Info
de Brito, José Brandão () (Banco de Portugal)
de Mello Sampayo, Felipa (Instituto Superior D. Afonso III - INUAF)

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

Find related papers by JEL classification:
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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