Barriers To FDI Under Political Risk

Topics:
Foreign Direct Investment
Tags:
Barrier,
Currency & Foreign Exchange,
Finance,
Foreign Direct Investment,
Foreign Direct Investment (FDI),
Investment,
University Of Iowa
Source:
University of Iowa

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Overview: Azzimonti, Sarte and Soares (2006b) document those countries with low political turnover exhibit larger in flows of foreign direct investment. This paper uses a simplified version of their model to illustrate the basic mechanism driving their result. In their paper, the correlation is rationalized with a model of redistribution, where policymakers have access to an expropriation technology that can be used to extract resources from foreign investors. They show that the larger the instability, the stronger the incentives to expropriate. This discourages FDI (Foreign Direct Investment) in flows as firms internalize the decrease in expected returns.

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Format: PDF | Size: 193KB | Date: Nov 2006 | Pages: 22

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