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

CEPR Discussion Paper Series No. 1891

Posted: 3 Dec 1998

See all articles by Monika Schnitzer

Monika Schnitzer

University of Munich - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: May 1998

Abstract

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

Schnitzer, Monika, Expropriation and Control Rights: A Dynamic Model of Foreign Direct Investment (May 1998). CEPR Discussion Paper Series No. 1891. Available at SSRN: https://ssrn.com/abstract=125491

Monika Schnitzer (Contact Author)

University of Munich - Department of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany
+49 89 2180 2217 (Phone)
+49 89 2180 2767 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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