TY - JOUR
T1 - Direct foreign investment and expropriation incentives
T2 - A mitigating role for match-specific capital
AU - Choi, Yongjae
AU - Esfahani, Hadi Salehi
PY - 1998
Y1 - 1998
N2 - This paper develops a model of direct foreign investment (DFI) in a country where the government cannot commit itself (through institutions or reputational concerns) to refraining from implicit expropriation of sunk investments by transnational enterprises (TNEs). In this situation, when the government lacks the necessary resources to finance the sunk costs of investment, DFI may be possible if there exist contracts under which the investing TNE ends up with a necessary amount of surplus to cover sunk investment. We argue that such contracts may exist if there is the TNE-country match generates specific rents. The presence of such rents is plausible because TNEs tend to have significant specific, "intangible" assets whose returns may vary across the myriad of country-specific conditions. The model helps explain the presence of uninsured foreign investment in countries with high policy risk. The model also offers predictions about the geographic and sectoral pattern of DFI across countries.
AB - This paper develops a model of direct foreign investment (DFI) in a country where the government cannot commit itself (through institutions or reputational concerns) to refraining from implicit expropriation of sunk investments by transnational enterprises (TNEs). In this situation, when the government lacks the necessary resources to finance the sunk costs of investment, DFI may be possible if there exist contracts under which the investing TNE ends up with a necessary amount of surplus to cover sunk investment. We argue that such contracts may exist if there is the TNE-country match generates specific rents. The presence of such rents is plausible because TNEs tend to have significant specific, "intangible" assets whose returns may vary across the myriad of country-specific conditions. The model helps explain the presence of uninsured foreign investment in countries with high policy risk. The model also offers predictions about the geographic and sectoral pattern of DFI across countries.
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U2 - 10.1016/s1062-9769(99)80103-3
DO - 10.1016/s1062-9769(99)80103-3
M3 - Article
AN - SCOPUS:0032011144
SN - 1062-9769
VL - 38
SP - 47
EP - 59
JO - Quarterly Review of Economics and Finance
JF - Quarterly Review of Economics and Finance
IS - 1
ER -