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Institutional uncertainty, economic integration, and vertical foreign direct investment decisions

Institutional uncertainty, economic integration, and vertical foreign direct investment decisions

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Original languageEnglish
Pages (from-to)593-612
Number of pages20
JournalOpen Economies Review
Volume22
Issue number4
DOIs
StatePublished - Sep 2011

Abstract

In this paper we analyse the impact of institutional uncertainty on vertical foreign direct investment (FDI) strategies. We also consider the impact of economic integration upon FDI decisions. The paper follows the real options approach, which allows investigating the value to a firm of waiting to invest and/or disinvest, when payoffs are stochastic due to institutional uncertainty and investments are partially reversible. Across the board we find that institutional uncertainty can be very detrimental to FDI decisions while economic integration leads to an increasing benefit of investing abroad.

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