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Mode of International Investment and Endogenous Risk of Expropriation

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  • Ramin Dadasov

    (RWTH Aachen University)

  • Oliver Lorz

    () (RWTH Aachen University)

Abstract

In this paper, we develop a politico-economic model to analyze the relationship between the mode of international investment and institutional quality in a non-democratic capital importing country. Foreign investors from a capital-rich North can either purchase productive assets in a capital-poor South and transfer their capital within integrated multinational rms or they can form joint ventures with local asset owners. The South is ruled by an autocratic elite that may use its political power to expropriate productive assets. In a joint venture, the domestic asset owner bears the risk of expropriation, whereas in an integrated rm, this risk affects the foreign investor. This effect lowers the incentives for specific investments in an integrated firm and distorts the decision between joint ventures and integrated production. By setting the institutional framework in the host country, the elite in uences the risk of expropriation. We determine the equilibrium risk of expropriation in this framework and the resulting pattern of international production. We also analyze as to how globalization, which is re ected in a decline in investment costs, in fluences institutional quality.

Suggested Citation

  • Ramin Dadasov & Oliver Lorz, 2010. "Mode of International Investment and Endogenous Risk of Expropriation," MAGKS Papers on Economics 201035, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:201035
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    File URL: http://www.uni-marburg.de/fb02/makro/forschung/35-2010_dadasov.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Foreign direct investment; joint venture; property rights; expropriation;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • P48 - Economic Systems - - Other Economic Systems - - - Political Economy; Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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