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Option value, policy uncertainty, and the foreign direct investment decision

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  • Yu-Fu Chen
  • Michael Funke

Abstract

In this paper we analyse the impact of policy uncertainty on foreign direct investment strategies. The paper follows the real options approach, which allows to investigate the value to a firm of waiting to invest and/or disinvest, when payoffs are stochastic due to political uncertainty and investments are partially reversible. Across the board we find that political uncertainty can be very detrimental to FDI decisions. --

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Bibliographic Info

Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2003 with number 14.

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Date of creation: 27 Sep 2004
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Handle: RePEc:mmf:mmfc03:14

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Web page: http://www.essex.ac.uk/afm/mmf/index.html

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Cited by:
  1. Wezel, Torsten, 2004. "Foreign Bank Entry into Emerging Economies: An Empirical Assessment of the Determinants and Risks Predicated on German FDI Data," Discussion Paper Series 1: Economic Studies 2004,01, Deutsche Bundesbank, Research Centre.
  2. Brandon Julio & Youngsuk Yook, 2013. "Policy uncertainty, irreversibility, and cross-border flows of capital," Finance and Economics Discussion Series 2013-64, Board of Governors of the Federal Reserve System (U.S.).

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