The Impact of Political Risk on the Foreign Direct Investment Decision: A Capital Budgeting Analysis

The Engineering Economist: Volume 45, Issue 2, 2000

University of Alberta School of Business Research Paper No. 2013-364

Posted: 5 Jun 2013

See all articles by Dorothee Feils

Dorothee Feils

University of Alberta - Department of Marketing, Business Economics & Law

Florin Sabac

University of Alberta - Department of Accounting, Operations & Information Systems

Date Written: 2006

Abstract

Using a capital budgeting framework, we examine the impact of political risk on the foreign direct investment decision. Political risk may alter operating cash flows via discriminatory regulations as well as the investment via expropriation. We model the impact of political operating costs and expropriation costs on the NPV of a project under the assumption that the parameters that affect the NPV are constant over the life of the project. Next, we provide an illustration for the case in which the relevant parameters are variable over the life of the project. The paper concludes with an example of political risk in the 1990s, the case of Black Sea Energy Ltd.'s investment in Russia.

Suggested Citation

Feils, Dorothee and Sabac, Florin, The Impact of Political Risk on the Foreign Direct Investment Decision: A Capital Budgeting Analysis (2006). The Engineering Economist: Volume 45, Issue 2, 2000, University of Alberta School of Business Research Paper No. 2013-364, Available at SSRN: https://ssrn.com/abstract=2274351

Dorothee Feils (Contact Author)

University of Alberta - Department of Marketing, Business Economics & Law ( email )

Edmonton, Alberta T6G 2R6
Canada

Florin Sabac

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada

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