The timing and probability of FDI: an application to US multinational enterprises

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Abstract:

An 'option-pricing' model is employed to analyse the timing of FDI. Assuming that the firm's profits are determined by the attractiveness of both the home and foreign countries, and that attractiveness follows a Brownian motion, an optimal trigger value of FDI is derived. The model shows that, contrary to the NPV rule, FDI entry should be delayed the greater the uncertainty of attractiveness in both locations. Another important result is that MNEs do not regard FDI as a risk-diversification tool. The results of the model were then tested empirically with US FDI data, using labour costs as a proxy for (the reciprocal of) attractiveness. The results support the findings of the analytical model.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/0003684042000295313

Affiliations: Universidade Lusófona de Humanidades e Tecnologias

Publication date: March 1, 2005

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