Country Risks and the Investment Activity of U.S. Multinationals in Developing Countries
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 forei...
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Format: | eBook |
Language: | English |
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Washington, D.C.
International Monetary Fund
1999
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Series: | IMF Working Papers
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Online Access: | |
Collection: | International Monetary Fund - Collection details see MPG.ReNa |
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 |
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Physical Description: | 27 pages |
ISBN: | 9781451855470 |