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Expropriation and control rights: A dynamic model of foreign direct investment

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  • Schnitzer, Monika

Abstract

This paper studies the strategic interaction between a foreign direct investor and a host country. We analyze how the investor can use his control rights to protect his investment if he faces the risk of \"creeping expropriation\" once his investment is sunk. It is shown that this hold-up problem may cause underinvestment if the outside option of the investor is too weak, and overinvestment if it is too strong. We also analyze the impact of spillover effects, we give a rationale for \"tax holidays\" and we examine how stochastic returns affect the strategic interaction of investor and host country.

Suggested Citation

  • Schnitzer, Monika, 1999. "Expropriation and control rights: A dynamic model of foreign direct investment," Munich Reprints in Economics 19890, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:19890
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    1. Jonathan Thomas & Tim Worrall, 1994. "Foreign Direct Investment and the Risk of Expropriation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(1), pages 81-108.
    2. Georg Noeldeke & Klaus Schmidt, 1998. "Sequential Investments and Options to Own," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 633-653, Winter.
    3. Grout, Paul A, 1984. "Investment and Wages in the Absence of Binding Contracts: A Nash Bargining Approach," Econometrica, Econometric Society, vol. 52(2), pages 449-460, March.
    4. Chris Doyle & Sweder Wijnbergen, 1994. "Taxation of foreign multinationals: A sequential bargaining approach to tax holidays," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 1(3), pages 211-225, October.
    5. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    6. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-826, September.
    7. Schnitzer, Monika, 1997. "Debt vs. Foreign Direct Investment: The Impact of Sovereign Risk on the Structure of International Capital Flows," CEPR Discussion Papers 1608, C.E.P.R. Discussion Papers.
    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.
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    More about this item

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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