Attracting FDI in a Politically Risky World
University of Mannheim - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)
International Economic Review, Vol. 43, pp. 1127-1155, 2002
Conventional wisdom holds that lack of government commitment deters foreign investment in developing countries. Yet this explanation is not convincing because some econometric studies have found little support for the role of political risk and host governments can offer upfront subsidies that compensate foreign investors for their sunk cost. This paper shows that a second commitment problem upsets the argument. A multinational firm cannot credibly commit to invest in only one country. Since countries differ in production costs and government credibility, this article explains the pattern of investment in a politically risky world.
Number of Pages in PDF File: 29Accepted Paper Series
Date posted: January 5, 2003
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