UNSPECIFIED (1994) FOREIGN DIRECT-INVESTMENT AND THE RISK OF EXPROPRIATION. REVIEW OF ECONOMIC STUDIES, 61 (1). pp. 81-108. ISSN 0034-6527

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Abstract

When an investor, for example a transnational corporation, invests abroad it runs the risk that its investment will be expropriated for the simple reason that international contracts are practically impossible to enforce. Any agreements or contracts then undertaken by the transnational company and the host country must be designed to be self-enforcing. It could be possible for the host country and the transnational corporation to find such self-enforcing agreements if there are future gains from trade. Thus although the host country might have a short-term incentive to expropriate, it has a long-term incentive to foster good relations with potential investors to attract more investment in the future. This conflict between short-term and long-term incentives determines the type of investment contracts agreed. This paper extends previous work on the general underprovision of investment when contracts are incomplete or only partially enforceable (see e.g. Grout (1984)) to a dynamic context. It is likewise shown that investment is initially underprovided but it increases over time and for certain parameter values it tends to the efficient level. The expected future discounted returns to the transnational company decline over time, extending Vernon's observation of the obsolescing bargain (Vernon (1971)). The model is also extended to allow for capital accumulation and consideration is given to renegotiation-proof contracts.

Item Type:	Journal Article
Subjects:	H Social Sciences > HC Economic History and Conditions
Journal or Publication Title:	REVIEW OF ECONOMIC STUDIES
Publisher:	REVIEW OF ECONOMIC STUDIES LTD
ISSN:	0034-6527
Date:	January 1994
Volume:	61
Number:	1
Number of Pages:	28
Page Range:	pp. 81-108
Publication Status:	Published
URI:	http://wrap.warwick.ac.uk/id/eprint/20832

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