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Multinational Firm Behaviour under Country Risk In the riskiest Countries

  • Faouzi Boujedra

    ()

    (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans)

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    This paper investigates the nature of the relationship between direct investment and country risk in southern countries, especially developing countries (vertical investment). Using a theoretical model, we show that a necessary condition exists and is sufficient for business risk to determine the entrepreneur's strategy to undertake an investment project if the mover-owner advantage exists in a country with risk. A Multinational Enterprise can invest in a big number of countries if the gains from invest are higher than country risk cost. The proposed model can be seen as an extension of Lehmann (1999) and Markusen (2004). This model makes the hypothesis that the MNE can only invest under a necessary and sufficient condition to achieve this investment project. This only choice is the condition of investment. The extension of this model is to illustrate under what conditions, a MNE will establish a foreign subsidiary in a risky world. The firm confronts itself to a choice between the investment opportunities and the risk in developing countries.

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    File URL: http://halshs.archives-ouvertes.fr/docs/00/73/61/38/PDF/Multinational_Firm_Behaviour_under_Country_Risk_2_.pdf
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    Paper provided by HAL in its series Working Papers with number halshs-00736138.

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    Date of creation: 17 Feb 2011
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    Handle: RePEc:hal:wpaper:halshs-00736138
    Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00736138
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    1. Rodrik, Dani, 1991. "Policy uncertainty and private investment in developing countries," Journal of Development Economics, Elsevier, vol. 36(2), pages 229-242, October.
    2. Moretto, Michele, 2000. "Irreversible investment with uncertainty and strategic behavior," Economic Modelling, Elsevier, vol. 17(4), pages 589-617, December.
    3. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
    4. Bertola, Guiseppe & Caballero, Ricardo J, 1994. "Irreversibility and Aggregate Investment," Review of Economic Studies, Wiley Blackwell, vol. 61(2), pages 223-46, April.
    5. John Dunning, 1981. "Explaining the international direct investment position of countries: Towards a dynamic or developmental approach," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 117(1), pages 30-64, March.
    6. Ben S. Bernanke, 1980. "Irreversibility, Uncertainty, and Cyclical Investment," NBER Working Papers 0502, National Bureau of Economic Research, Inc.
    7. Pietra Rivoli & Eugene Salorio, 1996. "Foreign Direct Investment and Investment under Uncertainty," Journal of International Business Studies, Palgrave Macmillan, vol. 27(2), pages 335-357, June.
    8. Oetzel, Jennifer M. & Bettis, Richard A. & Zenner, Marc, 2001. "Country risk measures: how risky are they?," Journal of World Business, Elsevier, vol. 36(2), pages 128-145, July.
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