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Country Risks and the Investment Activity of U.S. Multinationals in Developing Countries

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  • Alexander Lehmann
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    Abstract

    This paper develops a simple real options model that demonstrates the role of country-specific risk and sunk costs in determining a multinational’s choice between exports and foreign investment. The hypotheses from the model are tested for the distribution of capital expenditures by U.S.-owned foreign affiliates in 29 developing countries during 1984–95. Political and economic risk ratings are identified as deterrents to foreign capital formation; scale economies, unit wage differentials, trade openness, and agglomeration effects are found to be stimulating. These findings provide an additional rationale for a multilateral investment agreement that could function as an agency of restraint.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 99/133.

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    Length: 27
    Date of creation: 01 Oct 1999
    Date of revision:
    Handle: RePEc:imf:imfwpa:99/133

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    Cited by:
    1. Imad A Moosa & Buly A Cardak, 2003. "The Determinants of Foreign Direct Investment: An Extreme Bounds Analysis," Working Papers, School of Economics, La Trobe University 2003.02, School of Economics, La Trobe University.
    2. Guido Fioretti, 2005. "A Model of Primary and Secondary Waves in Investment Cycles," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 24(4), pages 357-381, June.
    3. Russ, Katheryn, 2004. "The Endogeneity of the Exchange Rate as a Determinant of FDI: A Model of Money, Entry, and Multinational Firms," Santa Cruz Department of Economics, Working Paper Series qt9xr4f238, Department of Economics, UC Santa Cruz.
    4. Katheryn Russ, 2012. "Exchange rate volatility and first-time entry by multinational firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 148(2), pages 269-295, June.
    5. Springer, Urs, 2003. "International diversification of investments in climate change mitigation," Ecological Economics, Elsevier, Elsevier, vol. 46(1), pages 181-193, August.
    6. Janeba, Eckhard, 2004. "Global corporations and local politics: income redistribution vs. FDI subsidies," Journal of Development Economics, Elsevier, Elsevier, vol. 74(2), pages 367-391, August.
    7. World Bank, 2002. "Brazil : The New Growth Agenda, Volume 2. Detailed Report," World Bank Other Operational Studies 15287, The World Bank.
    8. Desbordes, Rodolphe, 2007. "The sensitivity of U.S. multinational enterprises to political and macroeconomic uncertainty: A sectoral analysis," International Business Review, Elsevier, Elsevier, vol. 16(6), pages 732-750, December.
    9. Sunday Aninpah Khan, 2008. "Official Flows, Export Revenue, Volatility and Domestic Investment in Cameroon," The African Finance Journal, Africagrowth Institute, Africagrowth Institute, vol. 10(1), pages 72-88.

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