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Country Risks and the Investment Activity of U.S. Multinationals in Developing Countries

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  • Alexander Lehmann

Abstract

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.

Suggested Citation

  • Alexander Lehmann, 1999. "Country Risks and the Investment Activity of U.S. Multinationals in Developing Countries," IMF Working Papers 99/133, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:99/133
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    Cited by:

    1. Moosa, Imad A. & Cardak, Buly A., 2006. "The determinants of foreign direct investment: An extreme bounds analysis," Journal of Multinational Financial Management, Elsevier, pages 199-211.
    2. Desbordes, Rodolphe, 2007. "The sensitivity of U.S. multinational enterprises to political and macroeconomic uncertainty: A sectoral analysis," International Business Review, Elsevier, vol. 16(6), pages 732-750, December.
    3. Guido Fioretti, 2005. "A Model of Primary and Secondary Waves in Investment Cycles," Computational Economics, Springer;Society for Computational Economics, vol. 24(4), pages 357-381, June.
    4. Sunday Aninpah Khan, 2008. "Official Flows, Export Revenue, Volatility and Domestic Investment in Cameroon," The African Finance Journal, Africagrowth Institute, vol. 10(1), pages 72-88.
    5. Katheryn Russ, 2012. "Exchange rate volatility and first-time entry by multinational firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(2), pages 269-295, June.
    6. World Bank, 2002. "Brazil : The New Growth Agenda, Volume 2. Detailed Report," World Bank Other Operational Studies 15287, The World Bank.
    7. Russ, Katheryn, 2004. "The Endogeneity of the Exchange Rate as a Determinant of FDI: A Model of Money, Entry, and Multinational Firms," Santa Cruz Department of Economics, Working Paper Series qt9xr4f238, Department of Economics, UC Santa Cruz.
    8. Janeba, Eckhard, 2004. "Global corporations and local politics: income redistribution vs. FDI subsidies," Journal of Development Economics, Elsevier, vol. 74(2), pages 367-391, August.
    9. Springer, Urs, 2003. "International diversification of investments in climate change mitigation," Ecological Economics, Elsevier, vol. 46(1), pages 181-193, August.

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