Attracting FDI in a Politically Risky World

39 Pages Posted: 29 Jul 2001 Last revised: 6 Aug 2001

See all articles by Eckhard Janeba

Eckhard Janeba

University of Mannheim - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: July 2001

Abstract

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 paper explains the pattern of investment in a politically risky world.

Suggested Citation

Janeba, Eckhard, Attracting FDI in a Politically Risky World (July 2001). NBER Working Paper No. w8400. Available at SSRN: https://ssrn.com/abstract=278033

Eckhard Janeba (Contact Author)

University of Mannheim - Department of Economics ( email )

L7, 3-5
D-68131 Mannheim
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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