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Transfer Pricing and Direct Foreign Investment with Expropriation Risk

Author

Listed:
  • Yongjae Choi

    (Hankuk University of Foreign Studies)

  • Hadi S. Esfahani

    (University of Illinois Urbana-Champaign)

Abstract

This paper develops a game-theoretic model of direct foreign investment (DFI) in a country where the government cannot commit to refraining from expropriation of sunk investments by transnational enterprises (TNEs). In this situation, when the government lacks the necessary resources to finance the sunk costs of investment, DFI would be possible if there are self-enforcing contracts that give the investing TNE a minimum amount of the surplus generated by the project. We argue such contracts may exist if there are possibilities of transfer pricing on the part of the TNE. The particular example of transfer pricing examined here is a situation where the TNE is supposed to transfer its technology to the host country in exchange for a royalty. While transfer pricing is often seen as a negative aspect of TNE investments, our findings suggest that transfer pricing opportunities may indeed enhance DFI.

Suggested Citation

  • Yongjae Choi & Hadi S. Esfahani, 2004. "Transfer Pricing and Direct Foreign Investment with Expropriation Risk," Korean Economic Review, Korean Economic Association, vol. 20, pages 35-51.
    • Handle: RePEc:kea:keappr:ker-20040630-20-1-02
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    More about this item

    Keywords

    Direct Foreign Investment; Expropriation; Transfer Pricing;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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