Country Risks and the Investment Activity of U.S. Multinationals in Developing Countries

Alexander Lehmann

No 1999/133, IMF Working Papers from International Monetary Fund

Abstract: This paper develops a simple real options model that demonstrates the role of country-specific risk and sunk costs in determining a multinational’s choice between exports and foreign investment. The hypotheses from the model are tested for the distribution of capital expenditures by U.S.-owned foreign affiliates in 29 developing countries during 1984–95. Political and economic risk ratings are identified as deterrents to foreign capital formation; scale economies, unit wage differentials, trade openness, and agglomeration effects are found to be stimulating. These findings provide an additional rationale for a multilateral investment agreement that could function as an agency of restraint.

Keywords: WP; economic risk; Foreign investment; investment under uncertainty; investment regime; investment agreement; affiliate investment; investment decision; investment opportunity; investment stock; investment liberalization; further investment liberalisation; investment protection; investment activity; Capital spending; Foreign direct investment; Capital formation; Exports; Manufacturing (search for similar items in EconPapers)
Pages: 27
Date: 1999-10-01
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1999/133

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