Country Risks and the Investment Activity of U.S. Multinationals in Developing Countries
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Summary:
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.
Series:
Working Paper No. 1999/133
Subject:
Balance of payments Capital formation Capital spending Economic sectors Expenditure Exports Foreign direct investment International trade Manufacturing National accounts
English
Publication Date:
October 1, 1999
ISBN/ISSN:
9781451855470/1018-5941
Stock No:
WPIEA1331999
Pages:
27
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