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The timing and probability of FDI: an application to US multinational enterprises

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  • Jose Brandao de Brito
  • Felipa de Mello Sampayo

Abstract

An 'option-pricing' model is employed to analyse the timing of FDI. Assuming that the firm's profits are determined by the attractiveness of both the home and foreign countries, and that attractiveness follows a Brownian motion, an optimal trigger value of FDI is derived. The model shows that, contrary to the NPV rule, FDI entry should be delayed the greater the uncertainty of attractiveness in both locations. Another important result is that MNEs do not regard FDI as a risk-diversification tool. The results of the model were then tested empirically with US FDI data, using labour costs as a proxy for (the reciprocal of) attractiveness. The results support the findings of the analytical model.

Suggested Citation

  • Jose Brandao de Brito & Felipa de Mello Sampayo, 2005. "The timing and probability of FDI: an application to US multinational enterprises," Applied Economics, Taylor & Francis Journals, vol. 37(4), pages 417-437.
  • Handle: RePEc:taf:applec:v:37:y:2005:i:4:p:417-437 DOI: 10.1080/0003684042000295313
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    Cited by:

    1. Chenaf-Nicet, Dalila & Rougier, Eric, 2016. "The effect of macroeconomic instability on FDI flows: A gravity estimation of the impact of regional integration in the case of Euro-Mediterranean agreements," International Economics, Elsevier, vol. 145(C), pages 66-91.
    2. de Mello-Sampayo, Felipa & de Sousa-Vale, Sofia & Camões, Francisco, 2010. "Delaying the timing of offshoring low-skilled tasks," Economic Modelling, Elsevier, vol. 27(5), pages 951-958, September.
    3. Dreher, Axel & Nunnenkamp, Peter & Vadlamannati, Krishna Chaitanya, 2013. "The Role of Country-of-Origin Characteristics for Foreign Direct Investment and Technical Cooperation in Post-Reform India," World Development, Elsevier, vol. 44(C), pages 88-109.
    4. Henning Mühlen & Peter Nunnenkamp, 2011. "FDI by early movers, followers and latecomers: timing of entry by German firms during transition in the Czech Republic," Applied Economics Letters, Taylor & Francis Journals, vol. 18(18), pages 1729-1734, December.
    5. Luís Francisco Aguiar-Conraria & Gulamhussen, Mohamed Azzim, 2006. "Foreign Direct Investment in Brazil and Home Country Risk," NIPE Working Papers 7/2006, NIPE - Universidade do Minho.

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