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Publication Detailed Description
The timing and probability of FDI: an application to US multinational enterprises
Journal Title
Applied Economics
Year (definitive publication)
2005
Language
English
Country
United Kingdom
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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.
Acknowledgements
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Keywords
Fields of Science and Technology Classification
- Economics and Business - Social Sciences
