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The Hazard Rate of Foreign Direct Investment: A Structural Estimation of a Real Option Model

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  • Carlo Altomonte
  • Enrico Pennings

Abstract

The hazard rate of investment is derived within a real option model, and its properties are analyzed in order to directly study the relation between uncertainty and investment. Maximum likelihood estimates of the hazard are calculated using a sample of MNEs that have invested in Central and Eastern Europe over the period 1990-1998. Employing a standard, non-parametric specification of the hazard, our measure of uncertainty has a negative effect on investment, but the reduced-form model is unable to control for nonlinearities in the relationship. The structural estimation of the option-based hazard is instead able to account for the non-linearities and exhibits a significant value of waiting, though the latter is independent from our measure of uncertainty. This finding supports the existence of alternative channels through which uncertainty can affect investment.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 259.

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Date of creation: 2004
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Handle: RePEc:igi:igierp:259

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Cited by:
  1. George Dikos & Dimitrios Thomakos, 2012. "Econometric testing of the real option hypothesis: evidence from investment in oil tankers," Empirical Economics, Springer, Springer, vol. 42(1), pages 121-145, February.
  2. Swinnen, Johan F.M. & Vercammen, James, 2006. "Uncertainty and Specific Investment with Weak Contract Enforcement," 2006 Annual meeting, July 23-26, Long Beach, CA, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 21044, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  3. Phillips, Shauna & Ahmadi-Esfahani, Fredoun Z., . "Exchange Rates and Foreign Direct Investment: Theoretical Models and Empirical Evidence," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, Australian Agricultural and Resource Economics Society.
  4. Altomonte, Carlo & Pennings, Enrico, 2008. "Learning from foreign investment by rival firms: Theory and evidence," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(5), pages 1203-1217, September.

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