A note on political risk and the required return on foreign direct investment

Kirt C Butler and Domingo Castelo Joaquin
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Kirt C Butler: Michigan State University
Domingo Castelo Joaquin: Illinois State University

Journal of International Business Studies, 1998, vol. 29, issue 3, 599-607

Abstract: This note analyzes the impact of political risk on investors' required return and the multinational corporation's cost of capital on foreign direct investment using the basic diversifiable-nondiversifiable dichotomy of portfolio theory. Whether or not a particular political risk affects the value of a multinational corporation through its cost of capital depends on whether the risk is related to investors' relevant market portfolios. We provide a numerical example that illustrates the potential impact of political risk on required return.© 1998 JIBS. Journal of International Business Studies (1998) 29, 599–607

Date: 1998
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