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Attracting FDI in a Politically Risky World

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  • Eckhard Janeba

Abstract

Conventional wisdom holds that lack of government commitment deters foreign investment in developing countries. Yet this explanation is not convincing because some econometric studies have found little support for the role of political risk and host governments can offer upfront subsidies that compensate foreign investors for their sunk cost. This paper shows that a second commitment problem upsets the argument. A multinational firm cannot credibly commit to invest in only one country. Since countries differ in production costs and government credibility, this paper explains the pattern of investment in a politically risky world.

Suggested Citation

  • Eckhard Janeba, 2001. "Attracting FDI in a Politically Risky World," NBER Working Papers 8400, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:8400
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    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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