The Hazard Rate of Foreign Direct Investment: A Structural Estimation of a Real Option Model
AbstractThe 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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- Enrico Pennings & Carlo Altomonte, 2006. "The Hazard Rate of Foreign Direct Investment: A Structural Estimation of a Real-option Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(5), pages 569-593, October.
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