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Foreign Direct Investment: The Incentive to Expropriate and the Cost of Expropriation Risk

In: Numerical Methods in Finance

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  • Ephraim Clark

Abstract

This chapter examines the firm's cost of expropriation risk in a framework that links it to the government's incentive to expropriate. Using standard methods of stochastic calculus, the value of expropriation to the government is modeled as a function of the value of the Foreign Direct Investment, which fluctuates randomly over time. The cost of expropriation risk to the firm is modeled as the value of an insurance policy that pays off all net losses resulting from expropriation. It is shown that the firm's cost of expropriation risk depends on how the host government perceives the cost it will incur in the expropriation. Incomplete information brings out the give and take between government and firm found in the game theoretic models.

Suggested Citation

  • Ephraim Clark, 2005. "Foreign Direct Investment: The Incentive to Expropriate and the Cost of Expropriation Risk," Springer Books, in: Michèle Breton & Hatem Ben-Ameur (ed.), Numerical Methods in Finance, chapter 0, pages 159-171, Springer.
    • Handle: RePEc:spr:sprchp:978-0-387-25118-9_8
    DOI: 10.1007/0-387-25118-9_8
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