The timing and probability of FDI: an application to US multinational enterprises |
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| Authors: | José Brand?o de Brito Felipa de Mello Sampayo |
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| Affiliation: | 1. Banco de Portugal and Instituto Superior Técnico (Technical University of Lisbon) Research Department , Banco de Portugal , Rua Francisco Ribeiro, 2, 6th floor, 1150 Lisbon, Portugal;2. Universidade Lusófona de Humanidades e Tecnologias |
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| Abstract: | An ‘option-pricing’ model is employed to analyse the timing of FDI. Assuming that the firm's profits are determined by the attractiveness of both the home and foreign countries, and that attractiveness follows a Brownian motion, an optimal trigger value of FDI is derived. The model shows that, contrary to the NPV rule, FDI entry should be delayed the greater the uncertainty of attractiveness in both locations. Another important result is that MNEs do not regard FDI as a risk-diversification tool. The results of the model were then tested empirically with US FDI data, using labour costs as a proxy for (the reciprocal of) attractiveness. The results support the findings of the analytical model. |
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