Expropriation and Control Rights: A Dynamic Model of Foreign Direct Investment
CEPR Discussion Paper Series No. 1891
Posted: 3 Dec 1998
Date Written: May 1998
This paper studies the strategic interaction between a foreign direct investor and a host country. We analyze 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 analyze 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.
JEL Classification: F2, F34, L14, O12
Suggested Citation: Suggested Citation