The Hazard Rate of Foreign Direct Investment: A Structural Estimation of a Real Option Model

Carlo Altomonte () and Enrico Pennings ()

No 259, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: The hazard rate of investment is derived within a real option model, and its properties are analyzed in order to directly study the relation between uncertainty and investment. Maximum likelihood estimates of the hazard are calculated using a sample of MNEs that have invested in Central and Eastern Europe over the period 1990-1998. Employing a standard, non-parametric specification of the hazard, our measure of uncertainty has a negative effect on investment, but the reduced-form model is unable to control for nonlinearities in the relationship. The structural estimation of the option-based hazard is instead able to account for the non-linearities and exhibits a significant value of waiting, though the latter is independent from our measure of uncertainty. This finding supports the existence of alternative channels through which uncertainty can affect investment.

New Economics Papers: this item is included in nep-fin and nep-ifn
Date: 2004
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Journal Article: The Hazard Rate of Foreign Direct Investment: A Structural Estimation of a Real-option Model (2006)
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