The Effect of Capital Controlson Foreign Direct Investment Decisions Under Country Risk with Intangible Assets [electronic resource] / Kinga Z Elo.
Material type: TextSeries: IMF Working Papers; Working Paper ; No. 07/79Publication details: Washington, D.C. : International Monetary Fund, 2007Description: 1 online resource (62 p.)ISBN: 1451866437 :ISSN: 1018-5941Subject(s): Capital Control | Corporate Finance and Governance: Government Policy and Regulation | Decisions Under Uncertainty | Direct Investment | FDI | Foreign Direct Investment | Botswana | Bulgaria | China, People's Republic of | El Salvador | Korea, Republic ofAdditional physical formats: Print Version:: The Effect of Capital Controlson Foreign Direct Investment Decisions Under Country Risk with Intangible AssetsOnline resources: IMF e-Library | IMF Book Store Abstract: This paper examines how capital controls affect FDI decisions and how the impact of these restrictive measures varies with different levels of country risk. We construct a model of firms' FDI decisions, broadly in Dunning's "eclectic theory" framework, using "real options" to emphasize economic uncertainty and country risk. Numerical results of the model take the form of "quality statistics" that uncover the underlying dynamics hidden in the aggregate data that is responsible for the low performance of recent empirical studies. We find that increasing levels of capital controls reduce the life-span of FDI investments at each level of country risk and foreign investors' willingness towards risk sharing increases. We reveal a significant interaction between capital control and country risk, resulting in a nonlinear relationship between these and the volatility and volume statistics. We estimate a standard cross-sectional model that provides strong support for our theoretical findings.This paper examines how capital controls affect FDI decisions and how the impact of these restrictive measures varies with different levels of country risk. We construct a model of firms' FDI decisions, broadly in Dunning's "eclectic theory" framework, using "real options" to emphasize economic uncertainty and country risk. Numerical results of the model take the form of "quality statistics" that uncover the underlying dynamics hidden in the aggregate data that is responsible for the low performance of recent empirical studies. We find that increasing levels of capital controls reduce the life-span of FDI investments at each level of country risk and foreign investors' willingness towards risk sharing increases. We reveal a significant interaction between capital control and country risk, resulting in a nonlinear relationship between these and the volatility and volume statistics. We estimate a standard cross-sectional model that provides strong support for our theoretical findings.
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