| Publisher | International Monetary Fund | ||
|---|---|---|---|
| Format | 1.4MB PDF, requires Acrobat Rdr 5 | Date added | 01 Oct 1999 |
| Topics | Economic Modeling | ||
| Downloads | 22 | ||
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 deterrent 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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