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Title:Mode of international investment and endogenous risk of expropriation PDF Logo
Authors:Dadasov, Ramin
Lorz, Oliver
Issue Date:2010
Series/Report no.:Joint discussion paper series in economics 35-2010
Abstract:In this paper, we develop a politico-economic model to analyze the relationship between the mode of international investment and institutional quality in a non-democratic capital importing country. Foreign investors from a capital-rich North can either purchase productive assets in a capital-poor South and transfer their capital within integrated multinational firms or they can form joint ventures with local asset owners. The South is ruled by an autocratic elite that may use its political power to expropriate productive assets. In a joint venture, the domestic asset owner bears the risk of expropriation, whereas in an integrated firm, this risk affects the foreign investor. This effect lowers the incentives for specific investments in an integrated firm and distorts the decision between joint ventures and integrated production. By setting the institutional framework in the host country, the elite in uences the risk of expropriation. We determine the equilibrium risk of expropriation in this framework and the resulting pattern of international production. We also analyze as to how globalization, which is reflected in a decline in investment costs, in influences institutional quality.
Subjects:foreign direct investment
joint venture
property rights
expropriation
JEL:F21
L22
P48
Document Type:Working Paper
Appears in Collections:MAGKS Joint Discussion Paper Series in Economics, Universität Marburg

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