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Expropriation and Control Rights: A Dynamic Model of Foreign Direct Investment

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Schnitzer, Monika

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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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1891.

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Date of creation: May 1998
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Handle: RePEc:cpr:ceprdp:1891

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Related research
Keywords: Foreign Direct Investment; Implicit Contracts; Sovereign Risk;

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Find related papers by JEL classification:
F2 - International Economics - - International Factor Movements and International Business
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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  1. Konrad, Kai A & Kovenock, Dan, 2008. "Competition for FDI with Vintage Investment and Agglomeration Advantages," CEPR Discussion Papers 6740, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Müller, Thomas & Schnitzer, Monika, 2003. "Technology Transfer and Spillovers in International Joint Ventures," CEPR Discussion Papers 4099, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Kotseva, Rossitsa & Vettas, Nikolaos, 2005. "Foreign Direct Investment and Exports Dynamics with Demand Learning," CEPR Discussion Papers 5262, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Kesternich, Iris & Schnitzer, Monika, 2009. "Who is afraid of political risk? Multinational firms and their choice of capital structure," Discussion Paper Series 1: Economic Studies 2009,02, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
  5. Sebastian Kessing & Kai Konrad & Christos Kotsogiannis, 2009. "Federalism, weak institutions and the competition for foreign direct investment," International Tax and Public Finance, Springer, vol. 16(1), pages 105-123, February. [Downloadable!] (restricted)
  6. Swinnen, Johan F.M. & Vercammen, James, 2006. "Uncertainty and Specific Investment with Weak Contract Enforcement," 2006 Annual meeting, July 23-26, Long Beach, CA 21044, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  7. Turrini, Alessandro Antonio & Urban, Dieter M, 2001. "For Whom is MAI? A Theoretical Perspective on Multilateral Agreements on Investment," CEPR Discussion Papers 2774, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Haaland, Jan I. & Wooton, Ian, 2001. "Multinational Firms: Easy Come, Easy Go?," CEPR Discussion Papers 2660, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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