Option Value Policy Uncertainty And The Foreign Direct Investment Decision

Option value policy uncertainty and the foreign direct investment decision

The paper follows the real options approach, which allows to investigate the value to a firm of waiting to invest and/or disinvest, when payoffs are stochastic due to political uncertainty and investments are partially reversible. Across the board we find that political uncertainty can be very detrimental to FDI decisions.

Abstract In this paper we analyse the impact of policy uncertainty on foreign direct investment strategies. The paper follows the real options approach, which allows to investigate the value to a.

· In this paper we analyse the impact of policy uncertainty on foreign direct investment strategies. The paper follows the real options approach, which allows to investigate the value to a firm of waiting to invest and/or disinvest, when payoffs are stochastic due to political uncertainty and investments are partially zsnv.xn--90afd2apl4f.xn--p1ai by: Downloadable!

In this paper we analyse the impact of policy uncertainty on foreign direct investment strategies. The paper follows the real options approach, which allows to investigate the value to a firm of waiting to invest and/or disinvest, when payoffs are stochastic due to political uncertainty and investments are partially reversible. Option value, policy uncertainty and the foreign direct investment decision Chen, Yu-Fu; Funke, Michael Publication date: Link to publication in Discovery Research Portal Citation for published version (APA): Chen, Y-F., & Funke, M.

(). Option value, policy uncertainty and the foreign direct investment decision. Option value, policy uncertainty and the foreign direct investment decision By Yu-Fu Chen and Michael Funke Get PDF ( KB)Author: Yu-Fu Chen and Michael Funke.

Bankruptcy costs, economic policy uncertainty, and FDI ...

Abstract 'In this paper we analyse the impact of policy uncertainty on foreign direct investment strategies. The paper follows the real options approach, which allows to investigate the value to a firm of waiting to invest and/ or disinvest, when payoffs are stochastic due to political uncertainty and investments are partially zsnv.xn--90afd2apl4f.xn--p1ai by: Option Value, Policy Uncertainty, and the Foreign Direct Investment Decision.

HWWA Discussion Paper No. Number of pages: 23 Posted: 16 Jul Yu-Fu Chen and Michael Funke. University of Dundee - Department of Economic Studies and University of Hamburg - Department of Economics. While foreign direct investment (FDI) is known to be the most stable type of international capital flows, it may be particularly susceptible to heightened uncertainty because of its high fixed costs.

This paper investigates whether “trade policy uncertainty” (TPU), even absent changes in actual trade policy, may have an effect on foreign direct investment and export participation decisions. Option value, policy uncertainty, and the foreign direct investment decision. Yu-Fu Chen and Michael Funke. Money Macro and Finance (MMF) Research Group Conference from Money Macro and Finance Research Group. JEL-codes: D81 D92 E22 F21 (search for similar items in EconPapers) Date: References: View references in EconPapers View complete reference list from CitEc.

"Option value, policy uncertainty, and the foreign direct. · Option value, policy uncertainty, and the foreign direct investment decision. HWWA Discussion Paper, No. Chinchwadkar, R., and V. Shekhar. Evolution of Private Equity Regulations in Emerging Markets: a Case of India. The Journal of Private Equity 20 (1): 38– decision.

Policy Uncertainty, Irreversibility, and Cross-Border ...

In jargon, there is an option value in holding-back investment decisions (Dixit and Pindyck (, )). Given this irreversibility of physical capital, it may pay the investor to delay investments until uncertainty is reduced, though this (postponement) option carries a premium.

· “Option Value, Policy Uncertainty, and the Foreign Direct Investment Decision.” Hamburg Institute of International Economics Discussion Paper (). Chung, W., and Alcácer, J. “ Knowledge Seeking and Location Choice of Foreign Direct Investment in the United States.” Management Science, CiteSeerX - Document Details (Isaac Councill, Lee Giles, Pradeep Teregowda): The theory of the firm considers two ways of modeling the irreversibility of investment.

The proponents of the option theory have shown that irreversibility slows down the investment decision in case of uncertainty. Yet other seminal papers have established that sunk costs may enable incumbents to preempt a large part. regulation) that affect the profitability of investments, this uncertainty increases the option value of delaying decisions.

This paper develops a simple model in which uncertainty about future tax policy leads to a temporary reduction in investment. The basic idea is that policy uncer-tainty creates uncertainty about the profitability of. · The degree to which the optimal investment rule exceeds the standard positive NPV rule is a measure of the option value of optimising investment timing.

It can also be interpreted as a measure of the risk premium that could be incorporated into investment decision-making as a result of price uncertainty.

· “Option value, policy uncertainty, and the foreign direct investment decision.” (). Anand, Rahul, and Volodymyr Tulin. Disentangling India’s Investment Slowdown. · A Tax Paradox for Investment Decisions under Uncertainty. THOMAS GRIES. University of Paderborn uncertain investment projects and we show that—due to a flexibility premium—taxes asymmetrically affect the option value of projects that differ in their riskiness.

Artur Rodrigues, Foreign direct investment with tax holidays and policy. · Our findings indicate the relevance of economic policy uncertainty for the investment decisions of multinational enterprises (MNEs) in the U.S., and show that it could represent a tool policy makers could use to forecast and monitor changes in foreign direct flow.

Option value, policy uncertainty, and the foreign direct ...

The last quarter century has witnessed substantial growth in applications of real options theory (ROT) to international business (IB) research. In this review, we explicate the core ROT concepts in the IB context and discuss the contributions of ROT-based research to three core IB issues: timing and scale of market entry or exit, entry mode and governance form, and the role of multinational. Abel and Eberly, ; Bloom et al., ; Li et al., ).

According to real options theory, uncertainty increases the waiting value and causes firms cautiously making investment decisions. Therefore, the optimal decision for firms facing high uncertainty can be to reduce investments and. investment. Compared with portfolio investment, foreign direct investment is irreversible, given that the salvage value of direct investment is so small due to the idiosyncratic nature of production equipment.

Our analysis indicates that irreversibility and uncertainty induce delays in FDI disbursement. In this paper we analyse the impact of policy uncertainty on foreign direct investment strategies.

We also consider the impact of economic integration upon FDI decisions. The paper follows the real options approach, which allows investigating the value to a firm of waiting to invest and/or disinvest, when payoffs are stochastic due to political.

Using Text to Quantify Policy Uncertainty

Reducing Policy Uncertainty to Revive Investment 1. Executive summary This note explores the relationship between policy uncertainty and foreign direct investment (FDI) inflows, reasons of policy uncertainty, and attempts to identify measures to reduce policy uncertainty and.

Policy uncertainty is believed to affect foreign direct investment significantly, but, empirical evidence on the impact is scarce. Using data from Japanese MNCs and their foreign affiliates, we show how in-creased uncertainty (due to geopolitical conflicts) has variously affected sales and cap-ital investment of Japanese MNCs in China, forecast errors (FEs) of Japanese firms in. 1. For example, existing theories have shown that increased uncertainty raises the option.

opportunities, plays an important role in their strategic decision making. These challenges and opportunities in the international environment demand a theory, which helps to analyze MNEs’ strategies under uncertainty. Real options theory has enriched foreign direct investment (FDI) theory by introducing a new way of thinking—MNEs can.

· We consider the impact of tax policy uncertainty on firm level and aggregate investment, comparing investment behaviour when uncertainty is due to a shock following Geometric Brownian Motion (GBM) versus when random discrete jumps in tax policy occur. The strength of the relationship between uncertainty and the firm's decision to engage in foreign direct investment (FDI) is moderated by factors such as capital intensity and firm size. CiteSeerX - Document Details (Isaac Councill, Lee Giles, Pradeep Teregowda): Dundee & Hamburg, December In this paper we analyse the impact of policy uncertainty on foreign direct investment strategies.

We also consider the impact of economic integration upon FDI decisions. The paper follows the real options approach, which allows investigating the value to a firm of waiting to invest and. FOREIGN DIRECT INVESTMENT & EXCHANGE-RATE UNCERTAINTY that exchange-rate variability increases expected profits, and 3 increasedŽ. exchange-rate variability increases the value to the firm of the option obtained by opening both plants.

Expected profits when only the foreign plant is opened are given by.

University of Dundee Option value, policy uncertainty and ...

"Option Value, Policy Uncertainty and The Foreign Direct Investment Decision," Dundee Discussion Papers in EconomicsEconomic Studies, University of Dundee. Chen, Yu-Fu & Funke, Michael, "Option Value, Policy Uncertainty, and the Foreign Direct Investment Decision," Discussion Paper SeriesHamburg Institute of International.

The study of investment under uncertainty was stagnant for several decades, until recent developments in real options provided the tools to revitalize the field. The techniques and insights derived from option pricing can now be used to quantify the elusive elements of managerial operating flexibility and strategic interactions ignored or underestimated by conventional Net Present Value and.

//12 General Research Fund for “Policy Uncertainty and Foreign Direct Investment: Evidence from the China-Japan Island Dispute” (, HKD) (Hong Kong Government) //1 Seed Funding and Matching Fund for Basic Research (, HKD) (University of Hong Kong). e ects of these measures to speci c rm investment and sales decisions that also vary along all these dimensions and can thus help address endogeneity concerns. We build on the option value insights in Dixit () and Rodrik () and extend them to a context with trade policy uncertainty (TPU) and heterogenous rms.

We characterize policy. Lin Sun, Kexuan Zhou, Linhui Yu Does the reduction of regional trade policy uncertainty increase Chinese enterprises' outward foreign direct investment? Evidence from the China−ASEAN Free Trade Area, Pacific Economic Review 25, no.2 2 (Jun ): – and rising uncertainty.

Option Value Policy Uncertainty And The Foreign Direct Investment Decision - Does Uncertainty Over Economic Policy Harm Trade, Foreign ...

The pre-COVID global environment for foreign direct invest-ment (FDI) was already characterized by rapidly eroding investor confidence because of trade and investment policy uncertainty, lagging global growth, falling commodity prices, and rising protectionism. The COVID crisis presents a new, unprece. Policy uncertainty is believed to affect foreign direct investment significantly, but, empirical evidence on the impact is scarce.

How does Policy Uncertainty affect Investment?

This column proposes a unique empirical strategy for identifying the impact of a change in policy uncertainty on FDI at the sector level by utilising information about reservations of certain obligations contained in international investment agreements. Foreign Direct Investment Under Uncertainty: An Options Pricing Strategy. Charlotte B. Broaden. Octo.

Option value policy uncertainty and the foreign direct investment decision

Introduction. Foreign direct investment (FDI) is one of the fastest growing strategic activities that corporations are pursing around the world. With over $7 trillion in global sales in – the value of goods and services. · Consistent with other researchers, I find that foreign direct investment is very sensitive to policy uncertainty.

A one standard deviation increase in US economic policy uncertainty.

Uncertainty and Investment Options

investment to demand shocks. Uncertainty increases real option values making firms more cautious when investing or disinvesting. This is confirmed both numerically for a model with a rich mix of adjustment costs, time-varying uncertainty, and aggregation over investment decisions and time and also empirically for a panel of manufacturing firms.

American Free Trade Agreement reduce policy uncertainty. The resulting posi - tive effect on international commerce raises living standards in the United States and abroad.

JEL codes: F1, F2 Keywords: economic policy uncertainty, trade policy, exports, imports, foreign direct investment. We provide theoretical and empirical evidence that policy uncertainty can significantly affect firm level investment and entry decisions in the context of international trade. When market entry costs are sunk, policy uncertainty can create a real option value of waiting to enter foreign markets until conditions improve or uncertainty is resolved.

levels of policy uncertainty abroad also impact trade and investment flows. Con - sumers and businesses would benefit from clear signals concerning the future course of economic policy in the United States and abroad.

JEL. codes: F1, F2, F3 Keywords: economic policy uncertainty, exports, imports, foreign direct investment. Robert Krol. As a result of this strategic effect, payoffs are in a rough sense more convex than in the case of no investment in a growth option.

When the strategic advantage is strong, increased uncertainty encourages investment in growth options: higher uncertainty means more opportunity rather than simply larger risk.

Option value policy uncertainty and the foreign direct investment decision

Option Value, Policy Uncertainty, and the Foreign Direct Investment Decision. Hamburg Institute of International Economics discussion paper. Chuhan, P., S.

Claessens, and N. Mamingi. Equity and Bond Flows to Latin America and Asia: the Role of Global and Country Factors. Journal of Development Econom dogenous to other factors that affect private investment decisions. Estimating the direction of causality between economic outcomes and policy uncertainty requires employing a vari-able or event that is correlated with policy uncertainty but uncorrelated with the economic conditions that drive foreign investment.

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