Country Risks and the Investment Activity of U.S. Multinationals in Developing Countries
This paper develops a simple real options model that demonstrates the role of country-specific risk and sunk costs in determining a multinational’s choice between exports and foreign investment. The hypotheses from the model are tested for the distribution of capital expenditures by U.S.-owned foreign affiliates in 29 developing countries during 1984–95. Political and economic risk ratings are identified as deterrents to foreign capital formation; scale economies, unit wage differentials, trade openness, and agglomeration effects are found to be stimulating. These findings provide an additional rationale for a multilateral investment agreement that could function as an agency of restraint.
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| Length: | 27 |
| Date of creation: | 01 Oct 1999 |
| Handle: | RePEc:imf:imfwpa:99/133 |
| Contact details of provider: | Postal: International Monetary Fund, Washington, DC USA Phone: (202) 623-7000 Fax: (202) 623-4661 Web page: http://www.imf.org/external/pubind.htm Email: More information through EDIRC
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| Order Information: | Web: http://www.imf.org/external/pubs/pubs/ord_info.htm |
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