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Political Risk, Economic Integration, and the Foreign Direct Investment Decision

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  • Yu-Fu Chen
  • Michael Funke

Abstract

In this paper we analyse the impact of policy uncertainty on foreign direct investment strategies. We also consider the impact of economic integration upon FDI decisions. The paper follows the real options approach, which allows investigating the value to a firm of waiting to invest and/or disinvest, when payoffs are stochastic due to political uncertainty and investments are partially reversible. Across the board we find that political uncertainty can be very detrimental to FDI decisions while economic integration leads to an increasing benefit of investing abroad.

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File URL: http://www.dundee.ac.uk/media/dundeewebsite/economicstudies/documents/discussion/DDPE_208.pdf
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Bibliographic Info

Paper provided by Economic Studies, University of Dundee in its series Dundee Discussion Papers in Economics with number 208.

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Length: 31 pages
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:dun:dpaper:208

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Postal: Dundee, DD1 4HN
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Web page: http://www.dundee.ac.uk/econman/
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Keywords: Political Risk; Real Options; Investment; Foreign Direct Investment;

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  1. Brenton, Paul & Gros, Daniel, 1997. "Trade Reorientation and Recovery in Transition Economies," Oxford Review of Economic Policy, Oxford University Press, vol. 13(2), pages 65-76, Summer.
  2. Dani Rodrik, 1989. "Policy Uncertainty and Private Investment in Developing Countries," NBER Working Papers 2999, National Bureau of Economic Research, Inc.
  3. Pietro Garibaldi & Nada Mora & Ratna Sahay & Jeromin Zettelmeyer, 2001. "What Moves Capital to Transition Economies?," IMF Staff Papers, Palgrave Macmillan, vol. 48(4), pages 6.
  4. Robert S. Pindyck & Andrés Solimano, 1993. "Economic Instability and Aggregate Investment," NBER Chapters, in: NBER Macroeconomics Annual 1993, Volume 8, pages 259-318 National Bureau of Economic Research, Inc.
  5. Brenton, Paul & Di Mauro, Francesca, 1999. "The Potential Magnitude and Impact of FDI flows to CEECs," Journal of Economic Integration, Center for Economic Integration, Sejong University, Center for Economic Integration, Sejong University, vol. 14, pages 59-74.
  6. Ephraim Clark, 2003. "Pricing the Cost of Expropriation Risk," Review of International Economics, Wiley Blackwell, vol. 11(2), pages 412-422, 05.
  7. Gregory J. Brock, 1998. "Foreign direct investment in Russia's regions 1993-95. Why so little and where has it gone?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 6(2), pages 349-360, November.
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Cited by:
  1. Alessandro Fedele & Paolo M. Panteghini & Sergio Vergalli, 2010. "Optimal Investment and Financial Strategies under Tax Rate Uncertainty," Working Papers 2010.68, Fondazione Eni Enrico Mattei.

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