Political Risk, Economic Integration, and the Foreign Direct Investment Decision

Yu-Fu Chen and Michael Funke

No 208, Dundee Discussion Papers in Economics from Economic Studies, University of Dundee

Abstract: In this paper we analyse the impact of policy uncertainty on foreign direct investment strategies. We also consider the impact of economic integration upon FDI decisions. The paper follows the real options approach, which allows investigating the value to a firm of waiting to invest and/or disinvest, when payoffs are stochastic due to political uncertainty and investments are partially reversible. Across the board we find that political uncertainty can be very detrimental to FDI decisions while economic integration leads to an increasing benefit of investing abroad.

Keywords: Political Risk; Real Options; Investment; Foreign Direct Investment (search for similar items in EconPapers)
JEL-codes: D81 D92 E22 F21 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2007-12
New Economics Papers: this item is included in nep-mac and nep-pol
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Citations: View citations in EconPapers (1)

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Working Paper: Political Risk, Economic Integration, and the Foreign Direct Investment Decision (2008)
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