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Attracting Fdi in a Politically Risky World

  • Eckhard Janeba

    (University of Colorado, NBER, and CESifo)

Conventional wisdom holds that lack of government commitment deters foreign investment in developing countries. Yet this explanation is not convincing because some econometric studies have found little support for the role of political risk and host governments can offer upfront subsidies that compensate foreign investors for their sunk cost. This paper shows that a second commitment problem upsets the argument. A multinational firm cannot credibly commit to invest in only one country. Since countries differ in production costs and government credibility, this article explains the pattern of investment in a politically risky world. Copyright 2002 by the Economics Department of the University of Pennsylvania and Osaka University Institute of Social and Economic Research Association

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 43 (2002)
Issue (Month): 4 (November)
Pages: 1127-1155

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Handle: RePEc:ier:iecrev:v:43:y:2002:i:4:p:1127-1155
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