Foreign direct investment and the risk of expropriation

Research output: Contribution to journalArticlepeer-review

Abstract

When a transnational corporation invests abroad, it runs the risk that its investment will be expropriated. Any agreements or contracts undertaken by the transnational company and the host country must be designed to be self-enforcing. This paper extends previous work on investment when contracts are incomplete to a dynamic context. It is shown that investment is initially underprovided but increases over time and for certain parameter values tends to the efficient level. The expected future discounted returns to the transnational company decline over time, extending R. Vernon's (1971) observation of the obsolescing bargain.
Original languageEnglish
Pages (from-to)81-108
Number of pages28
JournalReview of Economic Studies
Volume61
Issue number1
Publication statusPublished - Jan 1994

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