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Foreign Direcyt Investment and the Risk of Expropriation

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  • Thomas, J.
  • Worral, T.

Abstract

When a transnational corporation invests abroad, it runs the risk that its investment will be expropriated. Any agreements or contracts undertaken by the transnational company and the host country must be designed to be self-enforcing. This paper extends previous work on investment when contracts are incomplete to a dynamic context. It is shown that investment is initially underprovided but increases over time and for certain parameter values tends to the efficient level. The expected future discounted returns to the transnational company decline over time, extending R. Vernon's (1971) observation of the obsolescing bargain. Copyright 1994 by The Review of Economic Studies Limited.

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Bibliographic Info

Paper provided by Tilburg - Center for Economic Research in its series Papers with number 9126.

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Length: 35 pages
Date of creation: 1991
Date of revision:
Handle: RePEc:fth:tilbur:9126

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Postal: TILBURG UNIVERSITY, CENTER FOR ECONOMIC RESEARCH, 5000 LE TILBURG THE NETHERLANDS.
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Web page: http://center.uvt.nl/
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Keywords: investments ; risk ; manufacturing industries ; economic models;

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References

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  1. Doyle, Christopher & van Wijnbergen, Sweder, 1984. "Taxation of Foreign Multinationals: A Sequential Bargaining Approach to Tax Holidays," CEPR Discussion Papers 25, C.E.P.R. Discussion Papers.
  2. Kobrin, Stephen J., 1987. "Testing the bargaining hypothesis in the manufacturing sector in developing countries," International Organization, Cambridge University Press, vol. 41(04), pages 609-638, September.
  3. Asheim, G.B. & Strand, J., 1989. "Long-Term Union-Firm Contracts," Memorandum 08/1989, Oslo University, Department of Economics.
  4. Jean Tirole, 1985. "Procurement and Renegotiation," Working papers 362, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1986. "Optimal cartel equilibria with imperfect monitoring," Journal of Economic Theory, Elsevier, vol. 39(1), pages 251-269, June.
  6. Hardman Moore, John & Hart, Oliver, 1985. "Incomplete Contracts and Renegotiation," CEPR Discussion Papers 60, C.E.P.R. Discussion Papers.
  7. Jonathan Eaton & Mark Gersovitz, 1982. "A Theory of Expropriation and Deviations From Perfect Capital Mobility," NBER Working Papers 0972, National Bureau of Economic Research, Inc.
  8. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  9. Farrell, Joseph & Maskin, Eric, 1989. "Renegotiation in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 327-360, December.
  10. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
  12. Laffont, Jean-Jacques & Tirole, Jean, 1988. "The Dynamics of Incentive Contracts," Econometrica, Econometric Society, vol. 56(5), pages 1153-75, September.
  13. Long, Ngo Van, 1975. "Resource extraction under the uncertainty about possible nationalization," Journal of Economic Theory, Elsevier, vol. 10(1), pages 42-53, February.
  14. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-26, September.
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  1. Recursive Macroeconomic Theory

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