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Political Risk, Economic Integration, and the Foreign Direct Investment Decision

Listed author(s):
  • Chen, Yu-Fu
  • Funke, Michael

In this paper we analyse the impact of policy uncertainty on foreign direct investment strategies. We also consider the impact of economic integration upon FDI decisions. The paper follows the real options approach, which allows investigating 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 while economic integration leads to an increasing benefit of investing abroad.

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File URL: http://hdl.handle.net/10943/19
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Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2008-06.

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Date of creation: 2008
Handle: RePEc:edn:sirdps:19
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  26. Tony W Tong & Jeffrey J Reuer, 2007. "Real options in multinational corporations: organizational challenges and risk implications," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 38(2), pages 215-230, March.
  27. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 681-712.
  28. Perotti, Roberto & Alesina, Alberto, 1996. "Income Distribution, Political Instability, and Investment," Scholarly Articles 4553018, Harvard University Department of Economics.
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  30. Brenton, Paul & Di Mauro, Francesca, 1999. "The Potential Magnitude and Impact of FDI flows to CEECs," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 14, pages 59-74.
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