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Option Value, Policy Uncertainty, and the Foreign Direct Investment Decision

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  • Chen, Yu-Fu
  • Funke, Michael

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.

Suggested Citation

  • Chen, Yu-Fu & Funke, Michael, 2003. "Option Value, Policy Uncertainty, and the Foreign Direct Investment Decision," Discussion Paper Series 26373, Hamburg Institute of International Economics.
  • Handle: RePEc:ags:hwwadp:26373
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    File URL: http://ageconsearch.umn.edu/record/26373/files/dp030234.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jan Hendrik, Fisch, 2011. "Real call options to enlarge foreign subsidiaries - The moderating effect of irreversibility on the influence of economic volatility and political instability on subsequent FDI," Journal of World Business, Elsevier, vol. 46(4), pages 517-526, October.
    2. repec:wsi:qjfxxx:v:05:y:2015:i:01:n:s2010139215500159 is not listed on IDEAS
    3. 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.
    4. Lars WANG & Hidekazu ITOH, "undated". "Economic Effects of Information Technology Oriented Joint Ventures in China: A CGE Analysis," EcoMod2004 330600156, EcoMod.
    5. Julio, Brandon & Yook, Youngsuk, 2016. "Policy uncertainty, irreversibility, and cross-border flows of capital," Journal of International Economics, Elsevier, vol. 103(C), pages 13-26.
    6. 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 (US).

    More about this item

    Keywords

    International Relations/Trade;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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