FOREIGN DIRECT INVESTMENT,CREDIBLE POLICY: The Role of Risk Sharing |
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| Authors: | Udo Broll |
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| Affiliation: | 1. Wilmeth Professor of Economics at the Center for Research in International Economics and Department of Economics, at the University of Wisconsin-Milwaukee , Milwaukee;2. Assistant Professor of Economics at West Chester University in West Chester , Pennsylvania |
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| Abstract: | This article constructs a model of international joint ventures with risk sharing as the main motivation. A foreign firm decides whether to undertake full ownership foreign direct investment, or to form a public-private joint venture with the host country government in an economy in transition. In our framework uncertain taxation is the source of risk. It is demonstrated that start-up investment cost sharing by the host country government encourages foreign investment. Joint financing of investment can act as insurance for the multinational firm because cost sharing serves as a means to sustain the credibility of government policy. |
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