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Institutional uncertainty, economic integration and vertical foreign direct investment decisions

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Listed author(s):
  • 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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File URL: http://www.uni-hamburg.de/fachbereiche-einrichtungen/fb03/iwwt/makro/ChenMFOpen.pdf
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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
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 - - Micro-Based Behavioral Economics - - - 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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  17. Cherian, Joseph A. & Perotti, Enrico, 2001. "Option pricing and foreign investment under political risk," Journal of International Economics, Elsevier, vol. 55(2), pages 359-377, December.
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