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Institutional uncertainty, economic integration and vertical foreign direct investment decisions

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  • Michael Funke

    ()

  • Yu-Fu Chen

    ()

Abstract

In this paper we analyse the impact of institutional uncertainty on vertical foreign direct investment (FDI) 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 institutional uncertainty and investments are partially reversible. Across the board we find that institutional uncertainty can be very detrimental to FDI decisions while economic integration leads to an increasing benefit of investing abroad.

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Paper provided by Hamburg University, Department of Economics in its series Quantitative Macroeconomics Working Papers with number 20911.

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Date of creation: Nov 2009
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Handle: RePEc:ham:qmwops:20911
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Keywords: Institutional Uncertainty; Political Uncertainty; Real Options; Vertical Foreign Direct Investment;

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

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  9. Desai, Mihir & Antras, Pol & Foley, C. Fritz, 2009. "Multinational Firms, FDI Flows and Imperfect Capital Markets," Scholarly Articles 3199065, Harvard University Department of Economics.
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  14. Grossman, Gene M. & Helpman, Elhanan & Szeidl, Adam, 2006. "Optimal integration strategies for the multinational firm," Journal of International Economics, Elsevier, vol. 70(1), pages 216-238, September.
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  16. Yeaple, Stephen Ross, 2003. "The complex integration strategies of multinationals and cross country dependencies in the structure of foreign direct investment," Journal of International Economics, Elsevier, vol. 60(2), pages 293-314, August.
  17. Leahy, John V, 1993. "Investment in Competitive Equilibrium: The Optimality of Myopic Behavior," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 1105-33, November.
  18. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  19. Tony W Tong & Jeffrey J Reuer, 2007. "Real options in multinational corporations: organizational challenges and risk implications," Journal of International Business Studies, Palgrave Macmillan, vol. 38(2), pages 215-230, March.
  20. Richard Baldwin & Paul R. Krugman, 1986. "Persistent Trade Effects of Large Exchage Rate Shocks," NBER Working Papers 2017, National Bureau of Economic Research, Inc.
  21. Buckley, Adrian & Tse, Kalun, 1996. "Real operating options and foreign direct investment: A synthetic approach," European Management Journal, Elsevier, vol. 14(3), pages 304-314, June.
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