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

  • Alexander Lehmann
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    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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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 99/133.

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    Length: 27
    Date of creation: 01 Oct 1999
    Date of revision:
    Handle: RePEc:imf:imfwpa:99/133
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