The timing and the probability of FDI: an application to the US multinational enterprises

Jose Brandão de Brito () and Felipa de Mello Sampayo
Additional contact information
Felipa de Mello Sampayo: Instituto Superior D. Afonso III - INUAF
Authors registered in the RePEc Author Service: Felipa De Mello-Sampayo

No A3-4, 10th International Conference on Panel Data, Berlin, July 5-6, 2002 from International Conferences on Panel Data

Abstract: An 'option-pricing' model is employed to analyse when a firm should expand its production capabilities abroad. In a framework where the firm's profits are determined by some average of the attractiveness of the home and foreign countries, and attractiveness in each country follows differentiated Brownian motions, this paper derives an optimal trigger value for FDI. The model shows that, contrary to the NPV rule, FDI entry should be optimally delayed the greater the uncertainty surrounding the future path of attractiveness in both locations. The second part of the paper is devoted to empirically test the results of the model. Drawing on data of FDI from the US into a panel of developed and developing countries and using labour costs as a proxy for (the reciprocal of) attractiveness, our estimation overwhelmingly confirms the results of the model, namely that FDI entry events are negatively related to the uncertainty surrounding attractiveness.

Keywords: Foreign Direct Investment, Multinational Enterprises, Option-Pricing Model; Ordered Probit Model for Panel Data. (search for similar items in EconPapers)
JEL-codes: C13 C23 D81 F23 (search for similar items in EconPapers)
Date: 2002-06
New Economics Papers: this item is included in nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://econpapers.repec.org/cpd/2002/114_DeBrito.pdf (application/pdf)

Related works:
Journal Article: The timing and probability of FDI: an application to US multinational enterprises (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpd:pd2002:a3-4

Access Statistics for this paper

More papers in 10th International Conference on Panel Data, Berlin, July 5-6, 2002 from International Conferences on Panel Data
Bibliographic data for series maintained by Sune Karlsson ().