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

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Author Info
Yu-Fu Chen
Michael Funke

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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/econman/discussion/DDPE_208.pdf
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Paper provided by University of Dundee, Economic Studies in its series Discussion Papers 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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Related research
Keywords: Political Risk; Real Options; Investment; Foreign Direct Investment;

Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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