Expropriation and Control Rights: A Dynamic Model of Foreign Direct Investment

Monika Schnitzer ()

No 1891, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper studies the strategic interaction between a foreign direct investor and a host country. We analyse how the investor can use his control rights to protect his investment, if he faces the risk of ‘creeping expropriation’ once his investment is sunk. It is shown that this hold-up problem may cause underinvestment, if the outside option of the investor is too weak, and overinvestment if it is too strong. We also analyse the impact of spillover effects, give a rationale for ‘tax holidays’ and examine how stochastic returns affect the strategic interaction of investor and host country.

Keywords: Foreign Direct Investment; Implicit Contracts; Sovereign Risk (search for similar items in EconPapers)
JEL-codes: F2 F34 L14 O12 (search for similar items in EconPapers)
Date: 1998-05
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Expropriation and control rights: A dynamic model of foreign direct investment (1999)
Working Paper: Expropriation and control rights: A dynamic model of foreign direct investment (1999)
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