Chawla, Arunish (2008) Multinational firms, monopolistic competition and foreign investment uncertainty. CEPDP, 866. Centre for Economic Performance, London School of Economics and Poiltical Science, London, UK. ISBN 9780853282624
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Abstract
This is a model of multinational firms, which introduces option value of foreign direct investment, into a framework of Dixit-Stiglitz type monopolistic competition. Starting from a pure trading equilibrium and solving for the optimal investment rule gives a scale-up factor which implies existence of a wedge between markup revenues and foreign investment costs. Greater volatility and risk aversion increase this scale-up over foreign investment costs implying a delay in the exercise of FDI option, while growing market size and national income facilitate early exercise. The model is extended to include a Poisson jump process, which has policy implications for FDI reforms and explains ‘wait and watch’ behaviour of multinational firms better than a pure comparative advantage-trade cost framework does. While investment under uncertainty literature is based on the theory of call options, I solve ‘FDI option’ as a put option, thereby also enriching the theory of real options.
| Item Type: | Monograph (Discussion Paper) |
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| Official URL: | http://cep.lse.ac.uk |
| Additional Information: | © 2008 Arunish Chawla |
| Uncontrolled Keywords: | Multinational firm, monopolistic competition, foreign investment uncertainty, FDI option |
| Library of Congress subject classification: | H Social Sciences > HG Finance H Social Sciences > HD Industries. Land use. Labor |
| Journal of Economic Literature Classification System: | F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment; Long-Term Capital Movements F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms; International Business |
| Sets: | Collections > Economists Online Research centres and groups > Centre for Economic Performance (CEP) |
| Rights: | http://www.lse.ac.uk/library/rights/LSERO.htm |
| Identification Number: | 866 |
| URL: | http://eprints.lse.ac.uk/19592/ |
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