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Institutional Uncertainty, Economic Integration, and Vertical Foreign Direct Investment Decisions

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  • Michael Funke

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  • Yu-Fu Chen

    ()

Abstract

In this paper we analyse the impact of institutional uncertainty on vertical foreign direct investment (FDI) 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 institutional uncertainty and investments are partially reversible. Across the board we find that institutional 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.uni-hamburg.de/fachbereiche-einrichtungen/fb03/iwwt/makro/FDIopen.pdf
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Bibliographic Info

Paper provided by Hamburg University, Department of Economics in its series Quantitative Macroeconomics Working Papers with number 21108b.

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Date of creation: Aug 2011
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Handle: RePEc:ham:qmwops:21108b

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Keywords: Institutional uncertainty; Political risk; Real options; Vertical foreign direct investment;

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